Financial Security in Retirement: How to Secure Your Monthly Cash Flow - Part 1

If you're getting close to retirement, you're probably thinking, like many others, about where your monthly income will come from once you retire. It's a valid concern. How can you maintain your current lifestyle in the long term? Will there be enough money to support the life you and your family want? Are these thoughts on your mind? If they are, then this blog is for you.

The period of retirement can be filled with happiness or sadness, depending on the mindset and preparation you've made. It's crucial to view post-retirement life in two separate phases, especially if you decide to retire at 60.

The initial 15 years after retirement, from 60 to 75, are quite distinct from the following 15 years, from 76 to possibly 90 or beyond. With increasing life expectancy, it's important to plan. During the first 15 years, you still have plenty of time to pursue your passions that you may not have had the chance to do while working.

If you're planning to travel the world, see interesting places, and do fun things, you'll need more money in the first 15 years. After 76, people tend to slow down and have a more relaxed, homebound life. Expenses may go down, but the total amount might not change much.

POST RETIREMENT LIFE - HOW MUCH CORPUS DOES ONE NEED?

Understand Your Temperament

What corpus should one consider? There are two ways to approach this question. The first step is to analyze specific data points. There is no universal answer; customization is crucial. We are all unique individuals with different needs and temperaments. By focusing on each person's specific cash flow requirements and current needs, we can tailor a portfolio that suits them best.?

Identifying their temperament is crucial in determining the most suitable investment approach and potential returns. Working backward from this point allows us to pinpoint the ideal corpus for each individual.

Rule Of Thumb

Having said that, is there a rule of thumb for this? Yes, similar to many situations, there exists a rule of thumb. The rule of thumb I will provide is that for every ?50,000 per month of cash flow required, an investment of approximately 1.2 crores may be necessary. This estimation is based on a 5% factor, which is the basis of the rule of thumb.

If you're getting a 5% cash flow on your investment and an 8% or 9% overall weighted average return, the extra 2% or 3% can be reinvested to keep your investment growing. Remember, my friend, inflation is a reality. Therefore, it's not just 50,000. It's for every 50,000. If you have a monthly requirement of a lakh of rupees, you should ideally have 2.4 crores. However, this rule of thumb doesn't consider your interests like travel or hobbies.

It's best to go with the tried and true method of approaching homework. Take a moment to prepare yourself before jumping in. Either way, make sure to set aside some time to complete it. I promise you, that once you see the numbers in front of you, your anxiety will fade away.

Check out the video link for a more in-depth understanding

WHAT ARE THE OPTIONS TO INVEST TO START GENERATING A REGULAR CASH FLOW POST-RETIREMENT?

Generally, there are three areas to explore.

1. Government-Guaranteed Investment Options

These investments are part of what the Indian government offers. This means that there is a certain level of safety involved. Your principal amount will not disappear, giving you confidence in their security. What are the downsides? The returns are quite low. Since the rate of return is only slightly higher than the inflation rate, these products may not be suitable for long-term investment.?

They are more suitable for meeting your immediate financial needs. Consider allocating some of your funds to government-guaranteed schemes like the Senior Citizens Savings Plan, LIC’s Varishtha Bima Pension, the post office monthly income scheme, or the government of India's floating rate bond. All of these alternatives guarantee you a certain amount of returns. Just remember, the rate of return may not be as impressive as you hope for.

2. Hybrid Mutual Funds

A hybrid fund is essentially a blend of two asset classes. A hybrid fund may consist of a combination of stocks and bonds, or a combination of stocks, bonds, and a bit of gold. Hybrid funds are often considered safer than pure stock funds. This means that as a retiree, you can enjoy the advantage of lower volatility. Additionally, they can provide you with a steady cash flow through a systematic withdrawal plan.

3. Immediate Pension Plan

Once you retire and receive your retirement funds, you have the option to invest a portion of it into an immediate pension plan provided by different pension plan companies. By investing a lump sum, you can start receiving a pension from the following month onwards. This pension will continue for your lifetime and can be passed on to your spouse upon your passing. If neither of you is present, the original sum will be returned to the nominee listed in the policy.

Check out the video link for a more in-depth understanding There are two key points to remember when investing in an immediate pension plan:

• Firstly, a pension is entirely taxable in India, so it must be included in your IT return if you have taxable income, as it is subject to taxation.
• Secondly, pension is a relatively inflexible product, with limited options for withdrawal in case you need the funds. Therefore, we recommend not investing all your money in a pension product, but rather allocating a specific amount that you won't need in the foreseeable future. You can explore these three options.

How Can You Effectively Allocate Funds in Your Retirement Planning?

There are multiple approaches to using these funds, but I'll be highlighting the top two styles.

• A common tactic is to invest around 50 - 60% of the corpus in safe investments for the first 8 to 10 years. This is to shield against volatility and ensure steady, predictable returns. The remaining 50 or 40% is then allocated to high-risk equity mutual fund investments, with the expectation of significant growth in the corpus after a decade.
• Consider adopting a blended approach by balancing both equity and debt investments within a specific range. By doing so, you can continuously benefit from both portfolios right from the start and gradually see your equity investments thrive while your debt investments decrease over time. This represents the second choice available to you. Both the options are good.

What Factors Should You Consider When Choosing the Type of Funds to Invest In?

• Do you possess the right temperament to venture into high-risk investments and patiently wait for a decade to see substantial growth? This approach could greatly improve your financial stability in the later stages of life.
• Do you require a higher cash flow in the first 15 years or the second 15 years? Your investment strategy should align with this need. It's important to choose investments that can deliver the returns you seek. These factors are key in determining the most suitable investment approach for you.

Check out the video link for a more in-depth understanding

Tips for Generating Successful Post-Retirement Cash Flows

• You're never too young to start thinking about retirement. Starting early will benefit you in the long run. And if you're already in your fifties, there's no time like the present to get started.
• Plan ahead and prepare for inflation. It's a certainty. Consider this: you spend 50,000 at this moment. In ten years, you'll need a lakh of rupees. That's the truth. So, always factor in inflation when making financial decisions.
• Make sure to have a good amount of cash readily available in your investment portfolio. You never know when you might need quick access to funds for unexpected medical bills or other emergencies. Don't let all your money be inaccessible.
• Split your cash flows into two parts, each spanning 15 years. For the first 15 years, set aside additional funds to fully enjoy activities like traveling and pursuing hobbies while you are still active. The following 15 years may require less financial commitment.
• Make sure to keep an eye out for any new job opportunities that may be available to you. At 60 years old, you still have plenty of time to explore different work options.
• Many people are still engaging in part-time work at their own pace, in a flexible setting, and earning a modest income. Remember, every little bit you earn adds up in the long run.?
• Make sure you have a solid plan for retirement to avoid bringing anxiety into your post-retirement life.

Prepare yourself for a bright future by utilizing these easy-to-use tools that will assist you in managing your retirement funds. By investing some time now to plan, you can set the stage for a happy and prosperous life after retirement.

For the complete video experience, click on this link

"Stay Tuned for Part 2 - Calculations & Implications!"