Mumbai, Feb 23: OmniScience Capital has released a comprehensive report on retirement solutions highlighting the structural risks embedded in them. The report titled “The Science of Retirement Planning : Navigating Hidden Risks in a Long Retirement” underscores that retirement success is not determined solely by the starting corpus, but by how effectively that capital withstands inflation risk, longevity risk, and market volatility — particularly sequence-of-return risk over multi-decade horizons. The analysis evaluates four approaches — Fixed Deposits, Life Annuity, Systematic Withdrawal Plans (SWP) using hybrid funds, and an equity-biased aggressive strategy — assuming an initial corpus of Rs 1 crore, annual income requirement of ₹6 lakh in today’s terms and survival up to age 100.
Income Sustainability and Depletion Risk
Under conservative assumptions, a Fixed Deposit approach could see capital depleted by the mid-70s, with income already falling short of inflation-adjusted requirements by over 50% by age 70. A conventional SWP approach could face depletion risk by the early-80s, with deficits widening to over 30% by age 70. A life annuity may provide lifetime income continuity, but because payouts remain fixed, purchasing power erosion could result in deficits, potentially crossing 30% by age 70 and over 80% by age 100.
Table 1 : Nominal Corpus Levels over Time under Different Retirement Solutions
Table 2 : Annual Payouts Needed vs Received under Different Retirement Solutions
In contrast, an equity-biased aggressive strategy could potentially not only avoid depletion within the horizon examined but generate growing surpluses relative to inflation-adjusted income requirements — rising from single digit surplus at age 70 to over 30% by age 100.
Breakeven Corpus Levels
Recognising that a ₹1 crore corpus may not sustain inflation-adjusted income over a 40-year retirement horizon, the study also estimates the breakeven corpus required as a multiple of annual expenses.
Traditional fixed-deposit and insurance annuity-based structures could require close to 40 times annual expenses, conventional SWP structure could require roughly 30 times annual expenses. An equity-biased aggressive strategy could potentially sustain long-term income at approximately 20 times annual expenses.
Table 3 : Breakeven Corpus Required for survival until 40 Years after Retirement
Navigating Retirement Risks
Each retirement structure addresses certain risks while leaving others exposed. Fixed Deposits provide stability and predictability but may struggle to protect purchasing power depleting capital if income gaps are funded from corpus. Life Annuities eliminate longevity risk by guaranteeing lifetime income, yet do not adjust adequately for inflation. SWPs introduce growth potential to combat inflation but remain vulnerable to sequence-of-returns risk, particularly during early market downturns that can permanently impair capital.
An equity-biased strategy that maintains a dedicated debt portion as a buffer while keeping the remainder invested in equities could help navigate these shortcomings. By funding withdrawals from the debt bucket during weaker market phases and linking payouts to a fixed percentage of portfolio value, the approach aims to reduce the need to sell equities at depressed levels while retaining the ability to compound over time.
Since this approach allocates significant part of the investment corpus to equities and with the inherent volatile nature of equities it is expected that the portfolio value will fluctuate significantly. The suggested withdrawals which are defined as a percentage of the portfolio value would also vary in rupee terms. Hence, for the initial 3 to 5 years investors should be prepared for the portfolio volatility and the lower payouts in the rupee terms if markets are unfavourable (sequence of returns risk).
The infographic below illustrates how these vehicles compare across key retirement outcomes.