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How to manage your cash flows post retirement? - Outside View by PersonalFN
How to manage your cash flows post retirement?

When you are young, you manage all your expenses through your monthly income, save a part of it and invest it in different asset classes for long term.

But have you ever thought about what will happen once you retire?

How will you manage your regular expenses and where will you invest?

If you are still young and earning, this question would not even strike your mind; but you should ask those who have already retired. They are already facing such financial difficulties.

At PersonalFN our experience shows that, people often ask question such as:

  • Are my savings enough to sustain post-retirement period?

  • How can I get regular income from my investments to manage my regular expenses?

  • Should I invest for short term or long term?

  • Which asset class will suit my requirement?

  • What should be my asset allocation in Equity, Debt and Gold?
You see, all these are very relevant questions. And even if you are in the earning phase of the life cycle yet, you ought to be cognizant and plan well, or else you may have to confront the horror of being callousness or even procrastination in planning.

Being aware of the seriousness of all these questions, herein below we have explained each of them for the interest of our readers:
  1. Are my savings enough to sustain post-retirement period?

    Some may be under the impression that if you have monthly expenses of Rs 2,50,000 per annum and you require it for post-retirement period of 20 years, then a sum of Rs 50 lakh (2,50,000 * 20) should be enough. Well, while it seems very easy, the reality is quite different. You see, over the span of 20 years you ought to take into account the inflation factor, as it reduces the purchasing power of your hard earned money. Take an example of your grocery bills. Assuming it costs you Rs. 1,000 today, the fact is, it will not cost you the same 1 year later. Assuming inflation of 10%, your grocery will balloon by Rs. 100 and cost you Rs. 1,100 after a year.

    So to answer this question you need to calculate your retirement corpus by taking into consideration the inflation factor.

  2. How can I get regular income out of my investments to manage my regular expenses?

    As you know, once you retire you do not have any regular monthly income. So what you got to rely on is your savings. There are some financial products such as pension plans from insurance companies, dividends from mutual funds / stocks, interest from Bank FDs, Post office Monthly Income Scheme (POMIS), Senior Citizen Savings Scheme (SCSS) etc. which can provide you income at regular intervals. We generally recommend investing in various products and not rely on only one, as all of them have different features. We also recommend keeping 2 years of your regular expenses in liquid funds to maintain the liquidity and in order to face any medical emergency that may arise.

  3. Should I invest for short term or long term?

    Even though post retirement period is quite long generally ranging between 20-30 years, you still need to be very careful with your investments as you are totally dependent upon your savings. We recommend having investment from short term to medium term and try to avoid very long term investments as liquidity is one of the main considerations, along with risk appetite having generally reduced with progression in age and lack of regular earnings (from salary or business / profession).

  4. Which asset class will suit my requirement?

    Suitability of asset class depends upon how much risk you can take on your investments. Generally risk taking ability is low during post retirement period as there is no fresh regular income; so most of the investments should be debt.

  5. What should be my asset allocation in Equity, Debt and Gold?

    As answered in the previous question, asset allocation also depends upon the risk taking ability of an individual. PersonalFN generally recommends retired individuals to allocate higher proportion of their hard earned money in debt instruments and relatively smaller portion towards allocation in equity and gold. For individuals who have a moderate risk profile, 10-20% can be invested in Equity, 70-90% in Debt and 5-10% in Gold.

    As you must have observed planning for post-retirement period is a lot more different than planning for pre-retirement period. You need to maintain liquidity and keep risks low with your investments and at the same time ensure that you earn sufficient return so that you can comfortably live your retired life.

    So we think that although many of you may be in the earning phase of life cycle - and even earning a handsome amount - you shouldn't be complacent, and start plan for your retirement right away!

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


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