Retirement Investing and SWR
Safety First Investing, and Sustainable Withdrawal Rates – I am not sure how many of us have heard of these two words.
Safety First Investing – means you have to have created such a size of the corpus that there is no need to take equity market risk. How does this work?
Well, let us say the expenses of Mr. Raju is Rs. 5,00,000 per annum at the age of 60. Mathematically speaking he needs about Rs. 3 crores (30x his annual expenses) for his retirement. However, on an assumption that inflation is 6%, the TOTAL amount that he needs (by just adding up all his expenses over 30 years) that amount is Rs 4 crores. So if he just put Rs. 4 crores in an ultra-short bond fund portfolio – say 4 funds -in 2 names. Mr. Raju and Mrs. Raju. As a couple, they can withdraw Rs. 5L each (tax-free) and not worry AT ALL about market fluctuation.
What if they have Rs. 10 crores to invest? Well put Rs. 4 cr in Ultra-short bond fund and the remaining in Equities, Debt, and say Gold. Honestly, that money is going to be inherited by your children. Let them have a say, but there is no need to give it away when you are 60. However, when you are 80, your Liquid fund will be booming – you may have drawn less, or it would have earned a good rate of interest. At this stage you can look at the second bucket and decide to distribute a little. Remember the first bucket may be more than enough even if you live to 100 years of life!
THIS IS what is called “safety first investing”. I have another version of “Safety First Investing” – by creating a direct equity portfolio where Mr R’s dividend is Rs 10L at the age of 60 years. On an assumption that the portfolio is well managed, dividends will take care of inflation, and excess if any, will be invested in a Liquid fund.
SS
One other (Indian) solution/thought process, when you have 3 Cr, buy 5 ready-to-move-in houses x 60L each in different spots in metro city with reputed builders and collect 25K p.m rent from the houses. That is 15L p a. Rents are inflation adjusted over time. No worry about inflation or death timing or loss of capital. Capital eventually gets inherited. Sometimes of course, some of houses will lie vacant or may need maintenance expenses which is part of that business game – akin to businesses dealing with covid situation now.
Harit
sir, i calculated using excel. as per my calculations if expense is 10 lpa and inflation 6% then total of all expenses for the next 30 yrs is 7.9 cr. did i make a mistake?
subra
You are right Harit, I corrected the text, I had meant 5L at age 60, The total expenses comes to 3.95 crs
Francis
@SS, 60L house earning 25K pm rent sounds unrealistic !!
SS
@Francis, Welcome to Bangalore.
Please search on commonfloor or magicbricks please. Take average.
SS
@Francis, This is out of my experience as well. (1) My flat owner bought the house in 2016 for 56L. The apartments did not appreciate (second hand apartments it is hard to appreciate too). This is a known fact. de-monetization, covid etc could be other reasons for real-estate slump. However the rents have appreciated as you may have noticed in the rental sites by now. (Ignore exclusive and premium ads of these sites and calculate based on regular rents only.)
(2) Second experience.. Many farmers in outskirts of Bangalore (earlier rural bangalore) got their agricultural lands converted using ‘suitcase technology’ and tied up with builders and build malls in the locations. They are millionaires now multi-generation safe. The 2nd one is not for everyone, however the (1) is very real.
Atul
@SS things are going to change going forward. For example, pre-Covid19 Bangalore rents are driven by IT folks primarily, especially the millenials who dont want to buy house but would like to rent everything including house. Come 2020. Post Covid most of this folks will work from home and move to their natives, ready to take pay cut but have good family life. All this folks will move out of Bangalore and rents will collapse. What you see on Magicbricks and Nest are hyped prices. On the ground negotiations brings down the rent by 50%. In CBD Bangalore people have moved to outskirts, rents have slumped by 50-60%.
SS
@Atul, what you mentioned in 1st part is correct. However the rents are not hyped up and neither subject to negotiations. If you want 3rd opinion you may check 99 acres as well. This is because, imagine you are the landlord, and you want to fix the rent. You will refer to these same sites and decide on a rent. Plus you will also enquire the rentals with other landlords around this place. (1) If every one is ready to cut by half, all these rental ad sites will change their numbers to reflect realistic prices. But they have not done so. (2) land lord will continue to wait to get the prices on the rental sites instead of compelling to cut the rates to half. If you are from Bangalore/have friends, please check. If they quote below this number as rent, check if apt cost was 60L. Take average, not exceptions.
I have never seen rents going southwards in Bangalore, ever… Ditto for non-IT cities like Mumbai, Chennai, Delhi. Even on 1st point, I agree partially only. The moment people start leaving Bangalore it will start to become ’emptier’ and thus ‘attractive’. It will reach equilibrium point again. There is other infrastructure like hospitals, kids schools, coaching, malls, metro, airport access etc that the city life has to offer – which may not be readily available in native or villages (now). Like the earlier point, I haven’t seen a city population and buzz go down either. Especially with IT, think about this -> In 2010, $-INR is 50Rs. What Goras pay an IT guy was say, 50K pm suppose. In 2020, they pay 75K suppose, the $-INR is also 75. They still enjoy the cost benefit and will not pull out. The 25K will be absorbed proportionately by others in the system (like rent). Besides they have now printed 6Tn more. What do you think from macro economic perspective will happen ? (Refer Gresham’s law)
ck
With US bond yields in negative territory, asset classes like gold, silver, equity are rallying simultaneously (which is rather unusual). Cheap money is getting flooded and asset bubbles are getting formed in all likelihood. If there is a downturn, there won’t be any place to hide, with high probability of all asset classes falling together. Will India be an exception? Only time will tell.
SS
@CK, the money printed (US) I believe is going Government who is sitting on top of a Debt mountain and also to rich high class investors through debt routes who are keeping the Dow Jones and Nasdaq artificially up (at least till election). Otherwise when millions have lost jobs in US and businesses are closed, how the the stock market going up? But there are many optimistic stories from US analysts. Only a trickle of 6Tn reaches the ‘common man’ in US. US can resort to all measures saam-daam-dand-bhed threatening to unleash their military might on china,iran etc. and demand their sovereign debt be fully waived and begin on a clean slate. Coming to India, India can never be insulated from meltdown. 1/3 rd of GDP is through exports, the bad money flows into India too. If we choose to make Re strong, exports will go down and imports will go up and tilt the exim deficit balance on the wrong side. China will devalue their currency against $ and their exports will go up further (india loses the exports game). If you take a Indian domestic companies on BSE/NSE share holding, 1/2 is held by promoters (non-participating shares in BSE), 1/4 th by FII and 1/4th by DII. In case of FII pull out, stock markets will fall, we will also lose jobs and have a cascading effect on other businesses within. What do you think ?
ck
@SS, All are credible scenarios but scary. We are probably heading towards the fag end of an approximately 100 years cyclical sequence of Freedom–>Glory–>Wealth–>Vice–>Corruption–>Barbarism (US potentially unleashing its military might!). History repeating itself!!! Hope not..
SS
@CK, very correct. You can replace the word ‘Corruption’ by ‘Currency War’. It is already started. If you are curious, you can lookup this word ‘Currency War’ on Wiki and it is interesting story on how it ends.. That is what is happening right now I feel. When this thriller will end, no one can say, that is the suspense part.. 🙂