One of the problems with the goal of retirement is that unlike all other goals, you don’t get any loans to fund your retirement needs. Also, unlike yesteryears when children used to take care of their parents in their later years, things are a bit different now. So, it’s best not to depend on children for your retirement needs.
I was recently talking to an elder relative who is set to retire next year. His situation is something like this – lives in his own loan-free house, has kids settled abroad and not coming back, he will get close to Rs 1.5 crore in retirement payouts next year, has Rs 50 lakh more in separate investments. His monthly expenses are about Rs 60,000-70,000. Also, he will not be getting any pension from his employer.
He wanted to know how best the Rs 2-crore corpus could be deployed to take care of regular income needs, and more importantly, to ensure that he doesn’t run out of money before running out of years.
Bucket the retirement corpus
This is one way to handle my relative’s requirements. What needs to be done is to follow a simple Bucket strategy that apportions the corpus across different time-suitable asset buckets.
So, while one bucket will take care of regular income needs and act as a liquidity or contingency buffer for several years, the other one will invest to generate inflation-beating returns for those long years of retirement.
Here is how to go about doing it.
Create 2 Different Buckets
Bucket 1 (for regular income & contingencies) - In the first bucket, set aside Rs 60-70 lakh and invest these in 4-5 high-quality debt funds. From these funds, set up an automatic withdrawal or SWP of Rs 60,000-70,000 per month to simulate a regular income. While choosing debt funds for this bucket, it’s best to stick to schemes from ultra-short-duration, low-duration and short-duration categories only.
This bucket will easily take care of my relative’s expenses for 9-10 years. It will also act as a sort of Contingency* Fund from which money can be withdrawn quickly in times of need. And since expenses can vary quite a bit, if my relative is willing to choose a lower monthly SWP amount then the bucket can last a lot longer. In months where expenses suddenly shoot up, one can always withdraw more on an as-per-need basis. By the way, a part of this bucket can also be parked in the Government’s Senior Citizens Savings Scheme (SCSS) to generate quarterly income.
*This is important as health insurance is not sufficient and you need a separate medical contingency corpus during retirement. Read more here.
Bucket 2 (for higher growth) - The second bucket will contain the remaining Rs 1.3-1.4 crore. My relative was willing to take some risk for higher returns. And hence, this bucket can have some equity allocation so that at least a part of the portfolio grows at a reasonable pace and beats inflation. This money can be invested in Nifty 50- or Sensex-based Index Funds (40-50 percent), Aggressive Hybrid Funds (20-30 percent) and rest in safer SCSS, Pradhan Mantri Vaya Vandana Yojana (PMVVY) and RBI Floating Rate Bonds.
Since the money will be withdrawn from the first bucket (via SWP) for several years, the second bucket remains untouched and continues to grow. Assuming even an average return of just 9 percent, this second bucket will grow to almost Rs 3 crore in 10 years. My relative can then withdraw some money (enough for the next 10 years’ expenses) from this bucket and transfer it into the first bucket to take care of his requirements.
And this cycle is to be repeated every few years and one can continue to derive regular income year after year from the first bucket.One can even consider a smaller or larger first bucket depending on how aggressive or conservative the retiree is. So, there is no one-size-fits-all when it comes to bucket allocations. And eventually, it will depend on the individual’s income requirement, available corpus and risk appetite.
But the core idea is pretty simple. Use the first bucket for income needs and the second bucket for portfolio growth. This helps balance the income needs with that of growth needs by having debt in the first bucket for the short term, and equity in the second bucket for the long term.
What about buying rental real estate?It can be done but a few things need to be kept in mind. One, it will need a large upfront amount to buy the property. Two, one might be unable to keep the property on rent at all times. Three, later on, older retirees will find it difficult to keep up with the operational demands of real estate and tenants. However, one can consider this option if one already has sufficient assets in the two buckets and there is money to spare.