HOW CAN I PLAN FOR RS 2 LAKH MONTHLY INCOME AFTER 15 YEARS WITH 4 YEARS OF AGGRESSIVE INVESTING?
I want to build a corpus that can provide me with monthly returns of Rs 2 lakh after 15 years. I can invest for the next 4 years and require returns after 15 years. How much corpus would I need to generate Rs 2 lakh in monthly returns after 15 years? How much should I invest over the next 4 years? Kindly suggest.
Reply by: Tarun Birani, Founder and CEO, TBNG Capital Advisors
Building a corpus that provides a steady monthly income requires careful planning and realistic financial assumptions. Whether you're working toward financial independence, planning for a significant future expense, or aiming to create a passive income stream, the following approach can help you estimate how much to invest today to generate Rs 2 lakh per month in the future.
Step 1: Estimating the required corpus
To generate Rs 2 lakh per month—equivalent to Rs 24 lakh annually—15 years from now, you’ll need to accumulate a substantial corpus. A widely accepted rule for generating sustainable income from investments is the "safe withdrawal rate," typically set at 4% annually. This rule suggests that you can withdraw 4% of your total corpus each year without running the risk of depleting your savings too quickly.
Given this, we can calculate the corpus required to generate Rs 24 lakh per year using the following formula:
Required Corpus = Annual Income Needed / Safe Withdrawal Rate
= Rs 24,00,000 / 4% = Rs 6,00,00,000 (Rs 6 crore)
Thus, to ensure a monthly income of Rs 2 lakh, you’ll need to build a corpus of Rs 6 crore. However, it’s important to remember that this assumption hinges on maintaining a 4% withdrawal rate. Considering market volatility and inflationary pressures over time, this is a conservative approach designed to ensure your corpus lasts for several decades.
Step 2: How much to invest over the next 4 years
Once you know that your target corpus is Rs 6 crore, the next step is to calculate how much you need to invest each month to reach that goal. For this example, let’s assume you can invest for the next 4 years and then let that money grow without further contributions for the remaining 11 years.
To project how your investments might grow, we assume an annual return of 10%, which is a reasonable expectation for a long-term, equity-focused portfolio. The key here is the concept of compounding.
Using financial calculators, we estimate that to achieve Rs 6 crore in 15 years, with a 10% annual return, you’ll need to invest approximately Rs 3.70 lakh per month for the next 4 years. This calculation factors in the compounding growth of your investments over the 11 years after your contributions cease.
Inflation and other assumptions
While the numbers above give a clear picture, it’s important to remember that these are based on certain assumptions. Inflation is one of the most critical factors that can affect both the value of your corpus and the purchasing power of the Rs 2 lakh monthly income you're targeting. A consistent inflation rate of 5-6% can significantly erode your purchasing power over 15 years. For instance, Rs 2 lakh today won’t have the same value 15 years from now.
Additionally, the 10% annual return used in these projections is based on historical performance, primarily of equity markets. However, actual returns can vary depending on market conditions, asset allocation, and risk tolerance. You may also need to adjust the safe withdrawal rate if you foresee needing your money to last longer than 20-30 years or if your portfolio includes more conservative, lower-return investments.
2024-09-13T03:48:25Z dg43tfdfdgfd