Of late, I have been getting several requests from people about how to structure their retirement corpus to get a certain amount of income every month for lifetime. I was however, quite surprised to get a request last week – the person said that he had 3 crores and was willing to deploy it as per my suggestions and wanted to check how much he could spend per year, if he had a lifetime of another 30 years.
So let us see this from a very basic retirement maths perspective first:-
- We will assume that the corpus is deployed so that the real rate of return is Zero. This essentially means that the returns from the portfolio will match inflation.
- In this scenario his overall costs over 30 years will be 30X ( assuming he spends @X each year ) and the limiting condition is 30X = 3 crores. This means X=10 lacs
- Going by this he can definitely spend an inflation adjusted amount of 10 lacs today.
- Note that he will not have any issues with this strategy as even very conservative investments are likely to match inflation. He can put money in PPF, Debt funds, VVY, SCSS etc and still be able to achieve this.
Let us extend the logic a little further and see if we can do better in some way. We will try to structure the portfolio in a manner suggested below:-
- Try to earn money in the first decade through debt investment returns. We will aim to earn 12 lacs in the first year to take care of the inflation within the decade. This is how it can be done:
- 60 lacs in VVY and SCSS (for the couple) will yield 4.8 lacs a year.
- 60 lacs in Debt funds will yield 4.8 lacs a year. This can be FMP type of funds where you use the capital gains for your expenses.
- 20 lacs in IndiGrid InvIT which is likely to give 2.4 lacs a year.
- 10 lacs in a liquid fund to cater for any financial emergency situation.
- Put 1 crore in an MF portfolio over a period of time. This can be through STP of 1 lac per month for 100 months.
- Put 50 lacs in stocks over a period of time. This should be based on markets and in the interim period the money can be kept in a Liquid fund.
- At the end of the first decade, continue with the Debt plan as before. You will now be spending about 25 lacs per year and half of it is generated from Debt portfolio.
- The MF will grow to about 1.6 crores by this time and stocks to 80 lacs. Set up a SWP from your MF to get 13 lacs every year @ 1 lac plus every month.
- In the third and final decade, your MF portfolio and Stock portfolio will be enough to take care of your expenses @50 lacs a year.
Finally, what if you want to spend more now and taper off your expenses as time goes by? Many may want to travel around the world in their first decade and reduce it over time. In this case let us assume you need an average expenses of 15 lacs in decade 1, 20 lacs in decade 2 and 30 lacs in decade 3. How do you cater to these?
- Put 1 crore in Liquid funds and spend from it for the first 10 years. The amount earned through interest will enable you to do this.
- Put 50 lacs in Debt funds, 1 crore in MF and 50 lacs in stocks.
- After 10 years the Debt funds will grow to about 1 crore, MF to about 1.6 crores and Stocks to about 80 lacs. I have assumed staggered investments and conservative returns to make this a very safe plan.
- In decade 2 spend from the Debt portfolio and do SWP from MF portfolio.
- In decade 3 use MF and stock portfolio.
So to answer the question of the person, he can even spend 15 lacs per year with a 3 crore corpus as long as it is structured properly. In terms of withdrawal rate this is a 5% but it should work quite well.
I hope this has proved to be useful to most of you and you can structure your portfolios in a similar manner to maximise your spending power.