Finance

MUTUAL FUND CALCULATOR: HOW MUCH MONTHLY SIP YOU NEED TO RETIRE AT 50

Priya is a 25-year-old working professional earning around Rs 50,000 per month. She wishes to retire by the age of 50, as she had begun her career quite early than her peers. Though Priya has a substantially higher risk profile, she is not comfortable with allocating her assets to direct assets. How can Priya achieve the same? How much should she invest to ensure that she successfully retires by the age of 50. In this article, we will try to understand the same.

Firstly, Priya needs to evaluate how much monthly or annual income would she require to ensure that she leads a comfortable life post retirement without compromising on her quality on life. Let’s assume that after careful analysis and evaluation, Priya realises that she would need around Rs 60,0000 per month to meet her financial needs post retirement. However, what Priya is forgetting over here is that if she wishes to retire after 25 years, then Rs 60,000 won’t be enough to sustain her needs. Why? Well, inflation – inflation has the power to decrease the purchasing power parity of a currency. Hence, it is important to factor in inflation while planning your investments and creating a financial plan. Assuming the rate of inflation at 6.5% per annum, Priya would need to ensure Rs 3 lacs per month to meet her financial needs. Even if one assumes to live for 15 years post their retirement, Priya would need a retirement corpus of around Rs 5.4 crores (Rs 3 lacs * 12 * 15).

But how can Priya achieve such a substantial sum of money? How much amount would she need to invest to achieve this investment corpus? As Priya has a long-term investment horizon of 25 years, she can easily afford to invest in equities. Equity mutual funds tend to offer significant returns to investors over a prolonged period. Let’s assume that the equity fund that she chooses to invest deliv-ers an average rate of return at 12% per annum. Using a mutual fund return calculator, she would find that Priya needs to save at least Rs 28,457 per month to lead a comfortable life post-retirement. Now, this might be a substantial amount for Priya, especially in her early years of career and she might not be able to afford to invest more than 50% of her income towards her retirement. In such a case, Priya can consider using step-up SIP for her investments. Step-up SIPs allow individuals to increase their investment amount in a systematic manner. An individual can increase their investment amount either through a fixed percentage each year or a fixed amount. The idea behind this SIP investment is that all individuals are likely to experience a surge in their income as their prosper in their career. Hence, they can afford to increase their SIP investment amount as well. Step-up SIPs can also allow investors to invest an amount that they can currently afford, and gradually increase this amount as their salary/income grows with time. Happy investing!

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