When you are accumulating for Retirement, you see where you are at the end of each year. If you think you are short, you invest more hoping that you will reach the magic figure soon! However if you are retired what do you do?

How do you do your assessment? Well there are some simple things which people use – let us see what they do.

If you have retired at 58 (assuming your earnings are now zero) and you live till the age of 90 – it means you will live for about 32 years in zero EARNED income and ONLY expenses kind of a scenario.

1. Β Most advisers /planners will tell you not to worry if you are living off your income and not touching your capital:

I do not like this method because in the 32 years inflation is likely to take a big toll of your income in the later years and that will hurt you bad.

2. If the value of your portfolio is greater at the end of the year than at the beginning of the year you are better off?

Well this is a nice test at the initial stage but at later stages when the expenses increase, your portfolio appreciation may not be ENOUGH to offset inflation AND keep the corpus intact in real terms.

3. Projected returns

Projecting returns of expenses and income is fine but what do you do when suddenly you find that the depreciation in your portfolio is very deep – and you have no time to react. Or that you have lost all risk appetite?

Well, here is what I have done for a recent retiree – only thing is his earned income is not going down – which means he will NOT PANIC EVEN if something goes wrong in his portfolio πŸ™‚

Let us call him X. He has a portfolio of Rs. 5 crores apart from a nice well furnished house in Mumbai and an ancestral house in Baroda. He plans to go and stay in Baroda once he is about 70 years of age. His elder brother and an unmarried sister are already there and Mr.X feels he is too young to go there. His Mumbai house is currently worth about Rs. 3 crores – and he hopes that it will fetch him at least Rs. 5 crores after 10 years when he plans to migrate.

His 5 crores is divided into – 1.8 crore in equity, Rs. 1.2 crore in debt instruments like ppf, bank fd, liquid funds, etc. (he is not yet entitled for senior citizen accounts), 1.8 crore in a property which pays him about Rs. 4 lakhs annual rent (this is his wife’s inherited property) and about 20 lakhs in miscellaneous assets including cash, bank, gold,…etc.

What will we do? ha that is another post, right?

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  1. I would be aiming to live off the real return ( notional return – inflation). Depending on the asset allocation, the real return could be 2-4% of the corpus. This requires a large corpus, but ensures maximum buffer we can get.

    Also, returns and inflation will fluctuate year on year, but over a longer term, both should revert to mean.

  2. I would switch all funds to dividend mode. Take monthly payout from FD for guaranteed income. on top of this guaranteed income, I would take 2-3 MIPs with MD option. Whenever any equity fund pays dividend, I would invest that dividend in one of the MIPs. This way I get 2 benefits. 1. I always have sizeable equity portion in portfolio. 2. I have inflation protected portfolio since every equity dividend contributes towards MIPs hence increasing their future payout.
    o

  3. Only thing to remember is that Fixed deposit should earn annual interest which doesnt exceed 10% tax bracket. Hence, ideal FD amount as of current tax slabs should be 25 to 30 lakh. This will provide guaranteed and tax free income of 20 to 25 thousand.
    All the income above this payout can be through dividends which are non taxable for receiver. Projected income from dividends can be around 1 lakh per month which can be sufficient for a retiree since he doesn’t have liabilities.
    He should generally limit expenses to 1 lakh and keep extra money as sweep-in just in case the MIPs fail to pay dividends. The concept here is.. SWP always erodes the capital in bad days. Hence dividends is the best way to safeguard the capital from getting eroded.
    If guarantee of enough minimum income is an issue then he can keep 3-5 lakh as buffer in Sweep-in FD and replenish it only it falls short of 1 lakh by selling some units as a last resort for temporary emergency.

  4. Waiting to read what you’ve recommended, Subrabhai.

    While I have something similar thought out, there are some assumptions like dividends will continue to be paid, inflation will be along this year’s numbers, property and rentals will continue to go up…

  5. @Mira D,
    The dividends do get paid eventually when stocks rise.

    Assume you have 25 lakh each in FD and 3 MIPs.
    You get income close to 1 lakh.

    He has 1.8 crore in equity.
    Let’s say he receives a dividend of 5 lakh.
    Instead of using that dividend directly, he can invest that dividend in either the FD or in the MIPs to increase total income generating capital from 1 crore to 1.05 crore which will never reduce. Next year,suppose he receives another dividend, that dividend again gets invested in FD or MIP to generate more monthly income. Here, the total income generating capital keeps increasing every year, without touching the equity portfolio.

    The capital appreciation of equity itself is the protection against inflation. Importantly, market risks will affect him very less because he is mostly getting income from cash portfolio which he can juggle between FD and MIS or MIP as he wishes.

    And any ways, there is already a provision of 5 lakh buffer cash to take care of missed MIP dividends. And.. he still has the freedom in any case to withdraw from equity if he really needs, with the understanding that it will reduce their future dividends.

  6. I am a 31 yr old govt employee (non-corrupt). I have complusory NPS (8500 per month with 12% increase yearly) as retirement corpus. SOmewhere i read that NPS is not the best retirement planning. What would be your advise. I also save 3500 in ELSS funds montlhy.

    that’s an idea for a blog post πŸ™‚

    thanks in advance

  7. @Jay Hind

    For those who have compulsory NPS, it is quite better due to a matching contribution by the govt. Hence you should not worry and go ahead with your full contribution of 12%.
    However it is not good for non-govt employees or self-employed people wherein govt does not give matching contribution which is not the case with you. You can go ahead with your full contribution.
    You can assume that the compulsory 40% annuity does not come out of your pocket as your contribution is just 50% throughout.

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