In the several posts I have written on retirement here, I have tried to give both my personal examples as well as those of others. Many readers who are considering retirement want to know if the money they have as corpus will be enough. Some think they have adequate money but are not sure of how to deploy it optimally. In this post let me give 3 examples of real life portfolios from retired people.
Before getting into the actual portfolios, it will be important to understand the pre-requisites, in order to be able to go for retirement in financial terms. These are :-
- You should have a place to live in. This can be either your own house or a rented one where you are covering the rent from what you get as rent of your house elsewhere. This is important as rent is inflationary and must be taken care of.
- All your major life goals should be over. Even if some goals such as children’s marriage are pending, you have separate funds for those.
- You have an ongoing Health insurance that you will continue with. Get this before you and your wife cross 50 years, they get very expensive afterwards.
- Your children are taking care of themselves in terms of financial expenses.
- You may still be earning some active income through use of your time but that is not considered in these portfolios.
Portfolio # 1:
This is the simplest portfolio I have seen with hardly any real risk and yet catering to almost any future eventuality.
- Tax free bonds of 1 crore invested in 2013 with an interest rate of 9 %. This yields an income of 9 lacs every year till 2028.
- PPF corpus of 40 lacs and contribution of 1.5 lacs every year till 2028. This will grow to more than 1 crore in 2028.
- Emergency funds of 10 lacs in Liquid funds.
- MF portfolio of 20 lacs and stock portfolio of 10 lacs now.
The couple have expenses of about 7 lacs per year and stay at their own home. They put 1.5 lacs in PPF every year and pay no taxes. In 2028 they can use the money from Tax free bond principal to invest in Debt or hybrid funds. At this time they will start using the PPF amount for the next 10 years. Note that this is also tax free. By 2038 their MF and stock portfolio should grow to 2 crores plus even with a modest return of 11 % or so. With another 2 crores from Debt funds they should have enough for the last phase of their life.
This is slightly more complex as equity and debt are both used. Let us first see the deployment here and we will then look at withdrawal.
- 1 crore in PPF as the couple were not salaried people and invested in PPF regularly over a long period.
- 50 lacs in various types of Debt funds at current market value.
- 40 lacs in equity MF and 10 lacs in stocks at current market value.
Assuming 30 years of retired life and an expense of 8 lacs per year in the first decade, this is how the couple have decided to go about it.
- Withdraw from PPF to the tune of 10 lacs for the first 10 years. This will still leave enough money after 10 years in the account.
- The 50 lacs Debt fund will grow to about 1.1 crores in 10 years. This along with the remaining amount in PPF will serve expenses of second decade.
- The Equity portfolio of 50 lacs will grow to 3.36 crores in 20 years. This should see the couple through the third decade, even though the expenses by now are about 32 lacs per year.
As a final portfolio, let us look into a more complex situation. Here, the resource base is larger and the expenses are also significantly higher.
- Two PPF accounts of 50 lacs and 10 lacs in current value.
- Tax free bonds of 24 lacs, maturing in 2028
- Equity Mutual funds of 50 lacs paying dividend of 3 lacs a year
- Equity Mutual funds of 50 lacs with growth option
- Stock portfolio of 1 crore with annual dividend of 3 lacs
- Debt funds of 1 crore with LTCG of 8 lacs every year
Assuming the current decade expenses will be 12 lacs at an average, 15 lacs in the next decade and 25 lacs in the last one, how should things be structured?
- Current passive income from interest and Dividends is 8 lacs. Another 8 lacs is from LTCG of Debt funds maturing every year.
- In the first decade the PPF accounts will be funded to the tune of 3 lacs every year.
- In decade 2, PPF can be used for withdrawal. The two accounts will suffice for these 10 years even without any fresh contributions.
- For the last decade stocks and MF can be redeemed to fund expenses.
So there you have it – while 1.5 crores plus is quite enough for expenses of 8-9 lacs in a year, if you want to spend more then you should look at higher corpus. But the real lesson is in the deployment of corpus and withdrawal strategies.
Will be happy to answer questions on this.