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How to earn inflation adjusted income of Rs 3 lakh per month

I want to earn inflation adjusted income of Rs 3 lakh per month for the next 15 years. What should my corpus be and in what instruments should I invest to have a reasonable certainty of getting this amount after forecasting inflation and tax (assuming the highest tax bracket).
Nripjit Singh Chawla

You will need a corpus of Rs 4.45 crore for your inflation adjusted income requirement of Rs 3 lakh per month for the next 15 years. We have considered a long-term inflation rate of 6% per annum and an after-tax weighted average return on investments at 8.85% per annum. The asset allocation should be 70 percent in debt (7.5 percent annual return) and 30 percent in stocks (12 percent annual return).

The rate of return (and therefore the corpus) will change if the asset allocation is modified according to the risk profile of the investor. We recommend that you allocate a larger amount for debt investment because you need regular income with reasonable certainty. Plus, stocks will help beat inflation in the long run.

Generally, retirement income is provided by the payment of dividends and interest. However, all interest income is taxable at the applicable tax base rate. Even in terms of dividend income, the tax on dividend distributions is 28.84% on the
dividend distributed by debt mutual funds. Providing income in the form of interest and dividend income is a very tax-inefficient strategy.

For the first three years: We recommend that you invest the amount equivalent to the income requirement of the first three years in arbitrage funds and liquid plus funds with dividend reinvestment option. You can then save a Systematic Withdrawal Plan (SWP) of the same monthly income requirement.

From the fourth year: Record a Systematic Withdrawal Plan (SWP) of long-term debt funds (more than three years). Since the investments will be long term, you will get the benefit of indexation upon redemption and therefore the capital gains tax will be minimal.

I expect Rs 10 lakh from the sale of my ancestral property next month and I want to invest it safely. My wife and I are retired government employees together and together we get a monthly pension of Rs 50,000. This covers our monthly expenses. I was thinking of putting the money in a debt fund. What type of debt fund should I turn to? All our other savings are in FD, around Rs 50 lakh.

– Sandeep Bhasin

Since you and your wife are retired and the main goal of your investments is preservation of capital, we recommend that you invest in good quality debt-focused funds. Debt funds ensure portfolio stability. Plus, they’re better investments than term deposits because you get a higher after-tax return from debt funds. When selecting a debt fund, you need to consider two factors. First, the credit quality of the debt securities in which the fund invests and second, the current interest rate scenario in the economy. In the current scenario, we recommend that you invest in good quality short- and medium-term debt mutual funds (AA / AAA rated papers) where the portfolio typically contains papers with a maturity of two to three. years.


The author is the founder and CEO of My Financial Advisor.

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