Post retirement income strategy for the 3 phases of retired life.

All of us have dreams in life and we set our goals accordingly, like holiday tour, car, home, children’s education etc.  We need to plan for goal with matching disciplined investments.   One of the goal in which needs to be planned differently is the retirement goal. The reason why the retirement planning is different is as follows.

  1. Retirement is not one time event but continuous process since the individual life expectancy cannot be predicted and cash inflow is required throughout the retired life.
  2. Loans available for other goals but not for retirement.
  3. Age is not the only criteria for retirement. People may take retirement at any age to live their own life.

We take term plan in pre-retirement stage as income replacement, whereas we plan retirement as expenses replacement.

There as three phases in retired life, of 5 to 10 years each, depending upon the individual life expectancies.

  1. Go-Go: During this phase retiree spend more and live active retired life and enjoy time and money freedom.
  2. Slow- Go: During this phase retiree spend lesser and live passive life.
  3. No-Go: This is bonus life where there would not be more interest in life and expenses increases due to health conditions.

Now the earning years have been decreasing due increasing education span and retired years have been increasing due to early retirements and increasing life expectancy. The new challenge for the retirees is decreasing rate of interest and increasing inflation which reduces the corpus value and increased expenses value, they need to get out of fixed deposit mindset. Now savers needs to opt for smart option such as equity mutual funds and balanced funds as source of regular income.

Instead of receiving interest he can withdraw 4% from hybrid mutual funds corpus. The return from the equity hybrid funds comfortably exceed the rate of inflation in the period over 5 years. This withdrawal will not be added to income. Capital gain tax will be due on withdrawal. If the holding period of the investment is greater than 1 year. The invested corpus required for the desired income will be half of the corpus required in FDs. Whenever there is withdrawals it is considered as gain and principle in the same proportion of gain and invested amount for tax purposes. The proportion of gain amount will be taxable thus makes a big difference in the tax liability.

Thus it is very clear that it is better to withdraw from equity based fund , rather than having interest income. The systematic withdrawal plan(SWP) is available with mutual funds. Although there is volatility in short term the long term planning will be fruitful.

Following are the strategies of SWP for getting post retirement income.

Three Bucket Strategy

  This is the sophisticated strategy which helps in both growing the retirement corpus in long term and facilitating immediate cash inflow required for the retiree and in sync with the three phases in the retired life. Under this approach the retirement corpus is allocated and invested in three different buckets as follows:

Bucket 1: (20 % corpus parked)

Instruments: Liquid Mutual funds with monthly SWP.

Bucket 2: (40% corpus invested for 6 year)

Instruments: Equity hybrid mutual fund.

In 6th year switch the fund to liquid fund in with monthly SWP.

Buckets 3: (40% corpus invested for 13 years)

Instrument: Equity diversified mutual fund.

In 13th year switch half of the fund value into Hybrid fund and the balance to liquid fund with monthly SWP.

In 19th year switch the hybrid fund to liquid fund with monthly SWP.

In 23rd year start liquidating the investment with systematic redemptions.

Investors need to be fully committed to follow this approach.  Since the equity market is volatile if the investor press panic button and withdraw from equity funds in between the very purpose of the strategy stands to be defeated.

The writer is a Chartered Financial Analyst (ICFAI).

If you’re wondering what type of investing strategy is right for you or if you simply need help for implementing it. You may find it helpful to talk to a financial adviser. It is crucial here to find the right adviser.

FinACTS Solutions can help you with our free investment portfolio health check-up, portfolio restructuring and portfolio building with our unique customised investment strategies.  All you have to do is send your portfolio to email address finacts19@gmail.com. FinACTS honours confidentiality and is committed to maintain it.

Be wise Money-wise.

K S Hegde

 

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