Passive income of Rs 1 lakh a month after retirement: Know the route map

Kolkata: One of the aspirations of almost everybody -- perhaps with the exception of maniac workaholics irrespective of how old they are -- is to achieve a significant passive income when one retires. The point to remember is that a passive income can become sizeable only when one can build a big corpus by the time of retirement. But a significant corpus is necessary condition but not a sufficient one -- one also has to invest the corpus in appropriate instruments to generate regular and stable income.

The rule of the thumb is, the bigger your corpus, the less the degree of risk you have to take to generate that coveted amount of Rs 1 lakh. Assume you have a corpus of Rs 3 crore. With this amount under your belt, you can hope to get Rs 1 lakh a month, or Rs 12 lakh a year, even if you put the money in an instrument that offers only 4% interest. Even bank fixed deposits offer significantly higher interest than that.

Therefore, if one has a corpus of Rs 2 crore, one can get Rs 12 lakh stable income a year by putting it in debt instruments that offers about 6% returns. These can be fixed deposits, debt mutual funds and even annuities. All these are quite free from risk and can offer stable returns every month.

If the retirement corpus is lower, you have to look for instruments that offer higher rate of returns -- may 8% or even higher. The Senior Citizens’ Savings Scheme is a guaranteed-income scheme that readily comes to mind but it has a cap of Rs 30 lakh. Other instruments are balanced hybrid funds or equity savings funds, points out investment strategist Nilanjan Dey, director, Wishlist Capital. These funds usually generate returns in excess of 8%. These rates of return will allow Rs 1 lakh passive income from a post-retirement corpus of Rs 1.5 crore.

As the post retirement corpus shrinks, the need to take risk with instruments that are capable of generating a higher return will become acute. back-of-the-envelope calculation will show that if someone can amass a post-retirement pool of Rs 1.25 crore, he/she has to find instruments that can generate 10% return on average. Nothing short of equity funds -- large-cap funds, large and mid-cap funds -- or perhaps aggressive hybrid funds can provide a sufficient of return.

If the pool of money is still lower, generating Rs 1 lakh a month will entail significant degree of risk. With a corpus of Rs 1 crore, one needs to get returns of about 12% or a bit more to reach that target of passive income. Multicap funds and flexicap funds could be the answer. Value Research has said flexi cap mutual funds have offered returns (CAGR) of 13.64% in the past 10 years.

However, with smaller corpus it could be a dangerous game. There are pitfalls -- if the returns are less than the required rate, continuous draw down can erode capital and it will become gradually impossible to get that sort of returns. Also inflation will eat into the real value of the passive income amount of Rs 1 lakh down the years.

Analysts are of the opinion that an initial corpus of Rs 2.5-3 crore seems safe since it can generate enough returns for one to withdraw Rs 1 lakh a month and yet have a surplus which should be invested back so that the pool keeps rising. investment of post-retirement funds is a risky business and should be done with extreme care. It is peudent to take the help of a qualified investment advisor in this matter.