How to save for retirement: Investment tips for moderate risk takers

I am 35, and recently started a new job with a monthly income of ₹1.5 lakh. I have no significant liabilities and can save 40% of my income. My investments include: ₹10 lakh in MFs (large- and mid-caps, and debt funds); ₹5 lakh in fixed deposit; and ₹3 lakh in PPF. I aim to accumulate ₹2 crore in 15 years for my retirement. I am willing to take moderate risk. Could you suggest an investment strategy that would help me achieve my goal?

—Name withheld on request

If you plan to retire at 50, you will need to build a big enough corpus to last you through 30-35 years of retirement, or even longer. Considering inflation, and the extended period in retirement will necessitate a larger corpus than ₹2 crore to provide for your needs. Let's assume you will need ₹75,000 per month to sustain your expenses. This is 50% of your current income.

If your retirement corpus of ₹2 crore (current prices) earns 9% returns, it will sustain inflation adjusted withdrawals of ₹75,000 for 32 years. This factors in a 7% increase in withdrawals every year to account for inflation.

Your investment portfolio of ₹18 lakh has roughly 50% in equities and 50% in debt. The post-tax blended returns from this asset mix can be assumed at 9%. While 9% returns can be considered good after retirement, they may not build a big enough corpus for you in the accumulation phase.

You are confident that you can earmark ₹60,000 (40% of current income) for retirement savings every month. But at 9% compounded returns, your corpus at 50 will be only ₹1.08 crore. If you withdraw ₹75,000 a month from this corpus, you will run out of money in less than 15 years (when you are 65).

If you want a bigger corpus that will last 30 years or more, you should increase the investment amount every year. A 10% increase in mutual fund SIPs and other investments every year will boost the corpus to ₹2 crore.

If increasing SIPs and other investments is not possible, you should consider deferring the retirement date by 3-4 years. It will not only help build a bigger corpus but the required sum will be lower because the retirement period will get shortened.

A third way to build a bigger corpus is changing your asset mix. Instead of 50% in equities and 50% in fixed income, opt for 70% in equities and 30% in debt. This allocation has more risk, but your investment horizon is very long. Over 15 years, the risk will get evened out and the blended investment returns can be higher at 10%. This will ensure you have a bigger retirement corpus by 50.

—Raj Khosla is founder and managing director of MyMoneyMantra.com