Financial Planning. How to manage post-retirement life with a smaller corpus

Mr A, aged 50 years, after having worked for the past 25 years, decided to retire and pursue his passion of becoming a full-time artist. He approached us for a financial strategy that could help him achieve his goal of retiring with immediate effect. His monthly expenses amount to ₹1 lakh per month; his approximate life expectancy is 80 years. We provided him with a strategy that can help him meet similar monthly expenses and ensure the same standard of living with a smaller corpus.

Currently, Mr A has a retirement corpus of ₹2.5 crore. In case, he doesn’t follow the strategy suggested by us and puts the entire amount in fixed deposits, monthly income schemes, etc, he would be requiring a retirement corpus of ₹3,36,44,860 to ensure that he maintains the same standard of living till the age of 80 years.

What people generally do is, the moment they retire, they put their entire money in instruments such as fixed deposits or go for some monthly income schemes, which, as of today, will give a return of around 7 per cent annually.

Suggested strategy

Rather, what can be done is, post retirement, we can divide the expected number of years to live into sections of 10 years each. In Mr A’s case, he can divide his timeline into three segments — years 50-60, 60-70 and 70-80.

For the first 10 years’ expenses, he should put his entire money in instruments such as FDs or monthly income schemes. For the next 10 years, he should invest in debt and equity instruments in a 60:40 ratio, which would give an average return of 10 per cent annually. To manage the last 10 years, he can invest in debt and equity instruments in a 25:75 ratio. This would give an average return of 12 per cent annually.

By following this strategy, he can meet his retirement expenses with a required corpus of ₹2,36,50,207, which is approximately ₹1 crore lesser than the amount which would be required if he doesn’t follow the suggested strategy.

Changing the mindset

One can vouch for the fact that the longer you stay invested, the lesser is the risk — risk and time horizon are inversely proportional in the market. The common mistake people often end up committing after retirement is that they always try to find avenues with zero risk. However, the truth is that there is nothing like zero risk. Even fixed deposits and government bonds carry risk.

This is the reason why people need to change their mindset regarding risk involved with investments. In Mr A’s case, the strategy is to break up the timeline in sets of 10 years and take well-calculated risks. In order to ensure ideal selection of investment products, consulting the right financial expert plays a major role.

Tips

Here are certain tips which can help you become better prepared for arguably the most crucial phase of your life, retirement.

1. Start saving early. Ideally, you should start saving from your first salary because nothing grows your money more than compounding. Let’s understand what compounding actually means — the re-investment of income at the same rate of return for frequently growing the principal amount, year after year. A prime example of compounding at work is cumulative fixed deposits, wherein the total interest that you are paid for the period is more than the rate of interest multiplied by the period of the deposit.

2. Managing risk is key — the better you manage, the more wealth you can generate.

3. Start with a small amount for investment. You need not wait till you have a huge investible surplus. Even an amount of ₹1,000 per month is good.

4. Always consult a professional financial advisor rather than blindly following the advice given by friends and family.

The writer is Senior Manager, Investment Advisory, Capital Quotient

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