EPF Investment: If you have an EPF corpus of ₹50 lakh at the time of retirement, the question isn't just where to park the money. The real challenge is how to cover monthly expenses using this amount without exhausting the funds too quickly.

Since the salary stops after retirement, allocating the EPF corpus across various investment avenues can help strike a balance between generating regular income and ensuring long-term growth.

How should the ₹50 lakh be allocated?

According to Akanksha Shukla, AVP (Wealth Management) at Master Capital Services, a retirement portfolio can maintain a balance between fixed income, debt, equity, and an emergency fund.

Taking the example of a ₹50 lakh corpus, approximately 45% (₹22.50 lakh) could be allocated to fixed-income options. Debt investments could account for 32.5% (₹16.25 lakh), while equity could make up 17.5% (₹8.75 lakh). The remaining ₹2.50 lakh could be set aside as an emergency fund.

Investment    Allocation    Amount
Fixed Income    45%    ₹22.50 lakh
Debt Investment    32.50%    ₹16.25 lakh
Equity    17.50%    ₹8.75 lakh
Emergency Fund    5%    ₹2.50 lakh
Total    100%    ₹50 lakh

This is merely an example. You can adjust these allocations based on your age, monthly expenses, pension, and risk appetite.

How much can be earned from fixed income?

The ₹22.50 lakh portion can be invested in fixed-income instruments like the Senior Citizen Savings Scheme (SCSS) or bank fixed deposits (FDs). If this portion earns an annual interest rate of around 7%, it would generate an annual interest income of approximately ₹1.57 lakh.

This translates to a monthly income of about ₹13,000 from this specific portion. Why is debt investment important?

The objective of allocating ₹16.25 lakh to debt investments is to stabilize the portfolio and ensure funds are available when needed. Options like debt mutual funds can help achieve this.

If this portion yields an annual return of approximately 6.5% over the long term, it could generate annual growth of around ₹1.06 lakh.

Keep some money in equity as well.

Parking all retirement funds in safe investments can expose the portfolio to the eroding effects of inflation. Therefore, in this example involving a ₹50 lakh corpus, ₹8.75 lakh has been allocated to equity.

This amount can be invested in options such as large-cap, index, or hybrid funds. The goal here is not necessarily to maximize annual returns, but to mitigate the impact of inflation on the corpus over the long term. Assuming an average annual return of 10% on this portion, it could generate growth of approximately ₹87,500 per year.

How much can be withdrawn monthly?

A crucial question regarding retirement is how much to withdraw annually from the ₹50 lakh corpus. According to Swati Jain, a strategy involving an annual withdrawal rate of 4% to 5% can be adopted.

At a 4% withdrawal rate, one could withdraw approximately ₹2 lakh annually from the ₹50 lakh corpus—translating to about ₹16,700 per month. If the withdrawal rate is set at 5%, the annual withdrawal would be around ₹2.50 lakh, resulting in a monthly amount of approximately ₹20,800. Thus, a monthly cash flow of roughly ₹16,700 to ₹20,800 can be generated from the ₹50 lakh corpus.

Set aside 1–2 years' worth of expenses.

Selling equity to cover expenses during a market downturn after retirement can prove detrimental. It is essential to set aside a certain amount to guard against this situation. Suppose your monthly expenditure is ₹20,000; this translates to an annual expense of ₹2.40 lakh. Consequently, you could set aside approximately ₹4.80 lakh to cover two years' worth of expenses.

This amount should be kept in an investment option where the funds are easily accessible. This ensures that, in the event of a significant market downturn, you would not need to sell equity holdings to meet daily living expenses.

Why not rely solely on EPF?

While EPF helps build a substantial corpus for retirement, financial needs shift after retiring. Instead of a monthly salary, you then require cash flow generated from investments.

According to Kunal Kabra, founder of Kustodian Life, fresh contributions to the EPF cease after the age of 58, and there are limits on the interest earned on the balance. Therefore, rather than relying exclusively on the EPF post-retirement, it is crucial to arrange for income streams from a variety of investments.