This post is inspired through a discussion I had some time ago with a long time friend. He was considering to get out of his current corporate job and wanted to set up a passive income stream that would take care of his regular expenses. When I pointed him to my posts on this topic he said that, while he had read those posts and understood the situation from my context, he needed to set this up from scratch.
The discussion set me thinking and I wanted to look at a situation which many people may be facing when they are nearing retirement or are considering an early retirement. While generalization is always difficult, a typical situation of such a person may be as follows.
- The person has an own home which is fully paid for by now.
- He has a PPF account for a long time but has not contributed the maximum in a regular manner. Current balance in the account is 24 lacs (say).
- His children are either independent or in college. In the latter case he has made arrangements for the remainder of their education expenses through FD etc. This is not linked to the passive income that he wants to have.
- Fixed deposit amount is 20 lacs, PO MIS is 9 lacs in a joint account.
- PF and gratuity will come to 1 crore when he withdraws it.
- MF portfolio is 20 lacs and stock portfolio is 6 lacs.
Based on this, how should the money be deployed so as to get a passive income of about 7 lacs a year? There may be many ways but the framework suggested below is a good one:-
- Keep the current MF and stock portfolio intact for the long term. You may need it for situations such as long term care, beyond the age of 80.
- New investments in PPF are not needed but keep the account active by paying a small subscription every year. This is your fall back mechanism if you suddenly need money for some unforeseen event. Also the interest of 1.8 lacs a year is tax free.
- 9 lacs of PO MIS will give an interest of 68400 every year. Use this for your income.
- FD of 15 lacs can be put in Senior citizen scheme if you are eligible. The interest from this will be about 1.25 lacs.
- Divide the 1 crore obtained from PF and gratuity as follows:
- 30 lacs in tax free bonds. This will give you an income of 2.3 lacs per year.
- 30 lacs in some dividend paying debt scheme such as Monthly Income Plan or Balanced funds. This will give you an income of 2.4 lacs odd.
- 10 lacs in a Liquid fund. Income from this will be about 70000 a year.
- Rest 30 lacs can be put in FMP or other Debt MF (short term) in the Growth option. After 3 years you can use the capital gain for consumption and reinvest the principal amount. This is mainly for discretionary expenses such as a vacation abroad etc.
What about inflation? Well, you have enough hedges in the plan for that. PPF can be drawn into, LTCG from FMP or debt funds are there and equity part will hopefully grow. Also over a period of time the 7 lacs needed in current terms may not suffer as much from inflation as we think. However, even if it does, the plan above is likely to cover it.
Note that the above is a low risk plan where your passive income is pretty much assured. Other options where you put more money into equity are possible but they come with a higher risk. You do want peace of mind when you are at this stage in life!!
So with an overall asset base of 1.79 crore (plus house), you can comfortably generate a passive income of 7 lacs and take care of the future also. I hope this convinces people that you do not necessarily need 5-6 crores to have a decent retired life. More importantly, you can lead the life you need to lead at the right time for yourself and your family.
An asset base of even 1.5 crores, deployed creatively, may well be enough for this person to retire. Take this framework as a reference and arrive at your own plans for that.