Post retirement 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.

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.

Be wise Moneywise.

K S Hegde,

 CFA(ICFAI)

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