I am 40 years old and earn Rs. 50,000 per month after tax. I want to retire after five years and start a business. I have around Rs30 lakh in fixed deposits. I also invest Rs. 5,000 per month in mutual funds. I live in a self-owned house. How should I invest to earn Rs. 1 lakh per month to cover my living expenses after I retire?
While you have disclosed your monthly investments in mutual funds, you have not stated the size of your existing mutual fund portfolio, the share of equity funds in it, the size of your estimated post-retirement benefits and the amount required as seed capital for your business. You have also not shared whether you plan to use this portfolio itself for arranging the capital for your business or you have an alternative portfolio or fund sources for it.
However, based on the information shared by you, it would be impossible to generate a post-retirement monthly income of Rs 1 lakh after 5 years. Moreover, starting a new business may involve a considerable gestation period before it reaches the break-even point. Till then, your portfolio would have to sustain occasional capital infusion requirements as well. Thus, you may have to rethink your early retirement and/or work on your current and post-retirement living expenses as well.
I would suggest you try to save at least 25% of your post-tax income, higher the better, for investments and then, estimate your post-retirement living expenses after assuming an inflation rate of 6%. This should halve your expected living expenses to about Rs 50,000 at the start of your post-retirement life phase.
Then, purchase health insurance cover of at least Rs 1 crore, with a base health cover of Rs 5 lakh and super top-up cover of Rs 95 lakh. This is important as there would not be any employer-provided health insurance cover in your post-retirement life phase. You can consider Niva Bupa or Aditya Birla health insurance companies to avail bigger health cover at very low premiums.
Also ensure to maintain a term insurance cover of about 10-15 times of your annual income to ensure financial security for your dependents. You can choose your term insurance cover(s) from any of the following private sector life insurance players — ICICI Prudential, HDFC Life, Max Life, Tata AIA, PNB Metlife and Bajaj Allianz Life.
Ensure to set aside an emergency fund to cover your unavoidable expenses for at least 6 months. Once you start your business, increase the emergency fund to cover at least 12 months’ expenses to make up for the lower income certainty associated with self-employment. Your existing fixed deposit portfolio can be used to create your emergency fund.
The amount required as the seed capital for your business can be sourced from your existing fixed deposits. Then, steadily shift your existing bank FDs, as and when they mature, to scheduled banks offering higher FD yields like Suryoday Bank, Unity Bank, Utkarsh Bank, Ujjivan Bank and AU Bank.
The rest of your fixed income portfolio and monthly investible surpluses can be invested in equity mutual funds through SIPs. You can distribute your SIPs equally among the flexicap, large cap index and aggressive hybrid fund categories through SIPs. You can consider the direct plans of PGIM India Flexi Cap Fund and Parag Parikh Flexi Cap Fund for the flexicap category; ICICI Prudential S&P BSE Sensex Index Fund and HDFC Index Fund – S&P BSE Sensex Plan for the large cap index category; and Kotak Equity Hybrid Fund and ICICI Prudential Equity and Debt Fund for the aggressive hybrid category.
Route your SIPs through the savings accounts of above-mentioned banks to earn higher returns on your savings account balance. Once you start your new journey as an entrepreneur, re-arrange your asset mix based on your living expenses and business requirements. Funds set aside for these requirements, at least for the next five years, should be parked in the high yield fixed deposits.
An edited version of this article was published in Economic Times on Jan 8, 2024.