The Idea of this post came from here. Dear Viren Phansalkar requested for a post on Post Retirement Planning. A lot of articles have been written on pre retirement planning. How one should invest, where to invest, when to start, when to stop, when to switch for a wonderful retirement. All this stuff is concentrated on how to prepare your cake to eat in your post retirement life. But not much info is there on how to deploy the corpus post retirement to earn return as well as income so that corpus can sustain the expenses till death which is going to be some 25-40 years away in post retirement life.
Few good posts are available with important calculators on dear Pattabiraman’s frrefincal.com Here are 2 such posts.
Few days back we also have a detailed group discussion in our FB group for a case study on post retirement planning. There can be multiple ways to deploy ones money for consumption in post retirement life. But the important thing is, the corpus should outlived the investor and spouse. In case the corpus deplete well before the actual death of investor (including spouse’s death), the deployment of money was not proper we can say.
Now problem in post retirement planning is complex due to 2 things.
2. Risk Tolerance
1. Inflation – it’s the single biggest enemy to any retirement portfolio in post retired life. Can any one of us imagine the impact of inflation in just 10Y time frame on a person from age 60 to 70? Most of you ‘ll quickly put a basic figure like 5-6-7-8-9 or 10% for retail level inflation. Is it the only inflation? Certainly not. The biggest impact of inflation ‘lll come in the form of healthcare cost. Interestingly this may anywhere from 15 to 25% and even more if health condition is not good. People may say that health insurance may take care off such inflation. Really? Try to read the queries on various forums where people want to purchase health insurance either for their own or for parents. Most of the time, the covers are either not available for the required sum assured or come with a hefty prem.
2. Risk Tolerance – When we are in job, we can bear few bad years of loss on our portfolio as we have both (time as well as resources – fresh money) to counter these loss. Once we set our feet in sunset years, neither we have enough time on our hand nor the resources – fresh money to overcome such loss on portfolio. This situation severely restricts the portfolio creation and deployment. So in a sense our risk tolerance level comes down to a very low point. This low risk tolerance may not allow to deploy more money in growth assets as safety of capital is prime importance here.
A very generic and crude solution is to split the whole corpus in following manner (what dear Pattu called bucketing).
1. 1 year equal expenses in SB account
2. Next 2 years equal expenses in FDs and liquid funds
3. Year 4 to 10 years’ expenses in FDs, short term funds and Arbitrage funds.
4. Year 10-20 years’ expenses in instruments at 3 above as well as add some Eq. to provide growth here.
5. Year 20+ years’ expenses in instruments + higher allocation in Eq.
I repeat the above solution is very generic in nature and the things should be done as per each individual’s own situation.
Please feel free to share your views in comments below.