You must have worked hard to build a robustnest for yourself. Now, it’s perhaps the time to convert it into monthly paychecks. The big question is how to manage your in a way that the corpus outlasts your lifetime.
It is about finding the right balance between extracting too much in terms of “income” versus being able to withdraw so little that your lifestyle is compromised significantly. Managing post-is all about meticulous planning. Here are the steps:
Few years before, financial usually recommend transferring a part of riskier into debt-oriented funds. This is because the is volatile in the short-term and cannot be relied upon for providing near-term income. Such transfers can happen through a Systematic Transfer Plan (STP) – which reduces the risk of timing the market.
Post-, start looking at your in five-year buckets – that is part of the that will be needed in the next five years and those beyond it. Ensure you invest the money required over the next five years in debt funds while continuing to invest the rest of the in equities and other .
Allocate smartly among assets
Don’t shun equities altogether just because you have retired. After retiring at 65 years, Indians can expect to live for another 25-30 years in general. And that’s a long time period to take exposure in equities. You need equities in yoursince its higher expected returns (11% p.a. as of 2021) has the potential to beat inflation (trending between 5%-6% p.a as of 2021) and generate wealth for your income.
How anexposure extends income? Let’s understand it with this case of three individuals – A, B and C each having a worth Rs 1.5 crore. Their annual expenses are Rs 6 lakh a year and all managed to save 25 times that amount as the target nest.
Now after, ‘A’ adopts a conservative approach and invests his entire kitty into a debt . ‘B’ in turn invests 20% in equities, while the rest is put into debt instruments. ‘C’ invests 50% in equities, while the other half is invested in debt instruments.
Post-retirement, start looking at your portfolio in five-year buckets – that is part of the portfolio that will be needed in the next five years and those beyond it.
Usually, the recommended drawdown rate is 4% in the first year and it keeps increasing to keep pace with inflation (more on it later). By resorting to such a drawdown, we find that A’swould last for about 24 years, while it is 28 years for and 35 years for ‘C’.
Higher exposure to equities increased thevalue of ‘C’ over the years thereby helping him reap income benefits for a longer time. For the sake of calculations, 11% annual returns were assumed for pure and 6% for pure debt .
However, it needs to be mentioned that very highexposure can also dent one’s especially if there is a bear market in the initial years. It reduces the principal which in turn directly impacts the effect that a retiree depends on for sustainability.
It is popularly known as the sequence risk – the danger of timing of the withdrawals affecting the investor’s return. In the above example, if the initial five years had witnessed a 5% decline every year, C’swould have lasted only 18 years instead of 35 years. This is despite the fact that the does the ‘catching’ up later.
Emphasise the safety of your corpus
The 4% drawdown rate suggests that you can withdraw 4% of yourin the first year. The 4% figure is adjusted for inflation. So, if inflation is expected to be 6% on an average, one increases the drawdown rate to 4.24% (adding 6% to 4%) in the second year and so on. These rates are only a rough guide. By being flexible and open, you can improve the chances of your outlasting your lifetime. How is that?
A JP Morgan study titled ‘ Breaking the 4% rule” found that calibrating withdrawal rates and bond exposure based on investor’s age, wealth, lifetime income and risk profile reduced the risk of either exhaustingtoo soon or amassing substantial amounts of wealth that will go unused. It suggested actively responding to withdrawal rates based on the market environment and individual situation.
Safety is paramount. It is desirable to leave behind some wealth rather than face a situation of a depletedkitty. Approach a who will customize your based on your age, value and market conditions at various points in time.
Don’t ignore equities even after you retire. Adjust drawdown rates based on your individualsituation to improve the chances of your nest outlasting your lifetime.