You take your portfolio, create an income and relax for the rest of your life, right? No. Wrong. Completely wrong.

You need to create buckets from which to:

  1. spend for regular expenses
  2. spend for emergencies
  3. spend for known major expenses – festivals, travel, buying white goods
  4. bucket to grow money for 4+ years
  5. bucket to grow money for 10+ years

Even if you do this, you have to know how much to spend. The spending has to ensure that the corpus outlives you. Of course it is different for people with:

  1. High annuities or pension
  2. Well earning children supporting without any effort
  3. People with a very huge surplus and not a penny spent of medical expenses

So how does one go about doing this?

  1. Spending a fixed AMOUNT every year without worrying about how much corpus is left.
  2. Spending a fixed PERCENTAGE every year without worrying about the current weighted yields
  3. Variable spending strategies is like a tactical shift in spending depending upon inflation and portfolio returns

A fixed amount to be spent (adjusting for inflation) makes sense if the DEBT corpus is big enough to meet expenses, with equity helping in the inflation bit. Even better if the person is spending less than the EQUITY dividend (from direct equities) – as dividends normally beat the inflation rates. However if there is a dimunition in the value of the equity portfolio it might scare the retired person. Exactly where the kids can step in and support them during the bad phase. We do not have any research in India on the spending patterns of retired people and thus we are unable to comment on how spending is happening and how it should happen. Currently we can only look at the US and depend on their data.

Sadly US does not have our equivalent of Govt assured decent return products like PPF, NSc, Kisan patra and things of this genre. We have no clue how an American with access to govt guaranteed schemes, but no social security would have behaved.

 

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  1. PPF is my favourite debt saving instrument. Agreed the yearly amount is small but then if you keep on investing 1.5 lakh for husband and wife each year and do not withdraw then the amount becomes significant. Extend after first 15 years in 5 year tranches.
    Hoping the govt in their reforms avatar do not kill this EEE instrument.

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