Generate a regular income in retirement
Everybody needs to plan for retirement. And the biggest thing that everybody has to prepare for is how to invest so that you don't outlive your investments. And this is the phase when you are most vulnerable, less confident and scared. And psychologically, you are unsure because your income has stopped now. So, it is important to build a solid plan which never fails.
How much does one need to retire?
Do I have enough to retire is a very subjective question. It can't be one amount fits all - it entirely depends on your state of expenditure and the likely changes in your configuration of your expense. But before that, you should see if you have some outstanding debt, should you become debt-free, more so on the eve of your retirement because I think that is an important step to take. And then you can cleanly look forward to your retirement planning or retirement investment planning, so to say. The starting point should be that if you're retiring now, then you have a far better and more realistic estimate of what your monthly expenses are, and multiply it with 12 and that is the return expectation or that is the minimum return expectation that should be from your investments, adjusted for any other income that you may have.
But more importantly, I would like to highlight a few things here for which every citizen or every person should be prepared for. Because the most complicated dimension of your retirement is that nobody knows how long you're going to live. So you have to prepare yourself in a manner that if you live forever, you should not outlive your investments, you should not outlive your savings. And how do you do that? You have to plan it in a manner that you're able to consume, it is able to support you meaningfully on a continuous basis and invested in a manner that has the possibility of you not running out of money. So these are very complicated dimensions of retirement investment planning. But if you do these things, one is that if you have 20 to 25 times your annual expenses in current value terms and it looks like it will be okay, not very comfortable but it will be reasonable to support you with income - there can be an investment plan which which can be done in a manner that it will not only support you with income, but it can be also invested in a manner that is able to grow as well besides giving you income. But before that get rid of your debt, clear up any contingency that might come your way, or any outstanding big expenditure that you would have planned for and it can happen. So all those things need to be carefully planned. But the investment plan that will support you with income needs to be invested in a manner, if you have to do it realistically, it should be somewhere between 20 to 25 times of your annual expenses.
Why is it essential to invest in equities post-retirement?
It is essential to invest simply because you need more in future. If you have any amount of money and if you're taking 5 per cent of that money every year, and that is divided over the next 12 months or divided into monthly withdrawals - that is fine for now. That might be fine for even the next year. But will it be good enough 10 years from now? The same amount of money would have lost its value and you will need much more five or 10 years from now simply because of inflation. And in that case, if you invest entirely in fixed income, which most people think that in retirement they have to be completely risk averse, it will not be good enough to support you because you don't have to necessarily just plan for today's income, you have to make sure that you have a future larger income requirement and invest in a manner that your investment will be able to support that and there is no other way, but investing in equity.
Now, one will say that this is the phase of life when people get very risk averse, why should they take the risk of equity. I would like to clarify here that volatility is not risk. When you invest in equity, it is very risky, but so is electricity, but we live with it. And that is why you have to configure yourself to live with it. This means being careful with equity and building your position and equity over a period of time and not investing at one go, diversifying your portfolio and periodic rebalancing. In your income portfolio, because you have to necessarily withdraw, rebalancing can be very well calibrated depending on your income and depending on what has gone up more.
How to decide on asset allocation?
Deciding asset allocation is a function of your comfort, how upset you get when the market goes down, or how comfortable or how used to you are. If you are starting today, if you have never invested in a market linked investment, never made a marketing investment, then you have to start conservatively, even if you are temperamentally venturesome. But still, I would say that most venturesome investors, most supposedly brave investors, when they are faced with the reality of the steep market decline in a brief period of time, it's very scary, and it's more scary when you retire. So, I would say that conservative investor, new investor should not have, even if you have requirements for larger or higher income, it should be a minority part of your investment - minority meaning 1/4 or 1/3, and write it on a piece of paper and then for the first few years, you should be rebalancing it to that and resetting that allocation every year, so that you develop a belief in this and at the same time, also able to ride the growth of equity.
If you are used to or if you're a confident investor, you are experienced and you also have some margin in terms that 3.5 or 4 per cent of income from your capital today will be enough to support your income, then I would say that you are a comfortable investor. And those investors I think, to keep it simple, it should be equally into equity and equally into fixed income, 50 per cent into equity and 60 per cent into fixed income. When I'm referring to equity allocation, I'm referring to (in your retirement the preferred vehicle) all your investment, which means it will also have Senior Citizen Savings Scheme, all the accumulation that you may have in Public Provident Fund and because they are the safest and highest yielding fixed income alternatives. Take them holistically and have 5-20 per cent in short-term debt fund. That will be the balancing fixed income allocation, you will have all the flexibility with these. The income you derive from Senior Citizen Savings Scheme and PPF will be either tax free income or the highest possible income. 10-15 per cent into short-term debt fund will be your rebalancing allocation. If fixed income becomes more than 50 per cent, you will reduce your allocation there. If it becomes substantially less, then you will move your money from equity into the short term debt fund.
And for the investors who invest in retirement and they don't have dependents on their investment for income, and if you get some periodic income, that will be fine, but you would ideally like to grow your money well so that you can leave a larger estate. If you are that kind of investor, then invest 25 per cent of your money or a third of your money into fixed income and have a substantial part into equity. The advantage of this will be that you will still have the rebalancing allocation to fixed income and you will be able to to sell high, buy low in a meaningful manner, and you will leave a much larger estate simply because you have the liberty and you don't depend on that income.
What should be the action plan for a retiree?
The retirement investment action plan should be, first and foremost, get rid of your debt, consolidate all your investment, at least if not consolidate into your bank account, make a list of what all is invested where and total it up. Make sure and choose one allocation whether you want to be 50 per cent into equity, whether you want to be 25 per cent into equity or whether you want to be 25 per cent into fixed income.
Do your estimation of your expenses, like if you retire today how much do you need every month? Multiply it with 12 and see that how much does it translate into, and also consider what will be your income from any source - will you get any pension, will you have some rental income, will you have some remittance from some children coming your way very regularly - f you have any of those things then total it up. Look at your income and expenses, and the difference has to be supported by your investment. If there is no difference, if your current income is more than what you spend today, then you are a very lucky retiree. And whatever is the gap, that needs to be invested. If that happens to be more than 5 per cent - assuming that you have Rs 1 crore and your income requirement which needs to be supported by this investment is more than Rs 5 lakh a year, then you need to really articulate and be careful about your investment here. And this needs to be invested in a manner that it keeps growing and you're able to withdraw and derive some income out of it at defined periodicity without the risk of eating into your capital.
And for this, the simple plan should be to choose your allocation and invest through diversified vehicles. In your fixed income allocation, retain your Senior Citizen Savings Scheme and PPF accumulation because they are the safest and high yielding option for Indian investors, and it's quite a privilege to have that, and do your annual rebalancing. Every year, take a look on first of April, how much of your money is growing in equity, how much of it is in debt, total it up, whether it has moved from 50 per cent into equity or debt and then make that change accordingly.
We did this illustration for you. If you would have invested Rs 50 lakh in 2013 (going backward and investing in equity and fixed income equally, and investing in a fairly average investment and not the extraordinary investment - I'm not taking the advantage of some outlier which was the highest best performing funds and things like that) and assuming that your need income withdrawal was 6 per cent, you could take out Rs 3 lakh every year. So, the result of this illustration from that diversified portfolio of equity and debt is that in the first year, you took out Rs 3 lakh, which was 6 per cent. Next year, you could have taken Rs 3,08,000 (the market did not go up very substantially after you took your Rs 3 lakh). The next year after that, in 2015, it got revised upwardly to Rs 3,51,000 per annum. So, as a result of this in 2023, your income every year has grown to Rs 4,32,000 which is 6 per cent of the enhanced capital of Rs 72 lakh. You started with Rs 50 lakh and it has grown to Rs 72 lakh. And 6 per cent withdrawal of that Rs 72 lakh is Rs 4,32,000 which has definitely grown much more than inflation and your investment is very much in a position to support higher income requirements even in future. With this plan, you are very unlikely to outlive your investments.
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