Funding your retirement goals with mutual funds

As we all know that mutual fund is one of the efficient investment products when it comes to investing for certain financial goals such as your child’s graduation, which is required 10 years from now for 4 years. Mutual funds can also fund one-time expenses like your child’s marriage which is required, say 15 years from today or buying a car which you plan to buy in the next 5 years. But all of these are short-term goals, in the sense that the requirement is one-time and may span not more than 15 years. Whereas when it comes to retirement, it is an investment for a very long-term tenure. It may require funding for a minimum of 15 years if the retirement age is assumed as 60 years and life expectancy is assumed as 75 years. Remember, in this period, a majority of people have little or no income, but daily basic expenses still continue.
 
To understand this better let us divide the retirement into two stages, i.e., one is pre-retirement stage or accumulation stage, where you would be accumulating funds and assets which you would be using in your post-retirement phase and second is the post-retirement stage of distribution stage, where the accumulated funds and assets are used as required.
 
So let us take an example. The investment in mutual funds via SIP (Systematic Investment Plan) would be done in the pre-retirement or accumulation stage and would be used or distributed via SWP (Systematic Withdrawal Plan) in post-retirement or distribution stage. So let us assume your current age is 30 years, you are going to retire at the age of 60, your life expectancy being 75 years and your current basic expense is Rs. 20,000 per month (Basic expense include all expenses except for education, life insurance premiums, EMI’s or any such expense which are not expected to arise after retirement). Considering inflation of 7 per cent at the age of retirement i.e. 60 years you would require Rs. 1.52 lakh per month and to cover this expense for the rest of 25 years i.e. till your age of 75, considering inflation of 5 per cent post-retirement and rate of returns expected to be 9 per cent post-retirement, you would require Rs. 2.97 crore at your age of 60.
 
So if we assume you invest 70 per cent in equity and expect it to provide returns at the rate of 14 per cent, and then invest 30 per cent in debt which is expected to provide 8 per cent return, via SIP route, then you would need to invest Rs. 9,300 per month until you reach your age of 60 or if you have Rs. 9.40 lakh in-hand and invest the same as a lumpsum, then you may be able to fund your retirement.