Retire Right: Making Your Money Last a Lifetime

Dec 2024 - 4 mins read

Retirement is a journey of rediscovering freedom, but ensuring financial independence through this phase requires careful planning. It’s not just about amassing a corpus during your working years; it’s about managing it prudently, so it supports you through an unpredictable future.

Take, for instance, Mr. Sharma, who retired at 60 with a substantial retirement corpus. For the first few years, he enjoyed the fruits of his labor, traveling and indulging in hobbies he had long postponed. However, by his late 60s, he realized his withdrawals had outpaced the growth of his investments. A combination of rising healthcare expenses and market volatility had taken its toll. Take another scenario, where you markets correct by varying degrees –some corrections could be as sharp as 40%, other corrections might be in the range of 5-20%. These stories are not uncommon. Retirement planning needs to carefully account for two crucial aspects: withdrawal strategy and investment rebalancing.

In this, a significant strategy which can be used to temporarily help manage a such dips into your retirement corpus could be – making use of your emergency fund, usually 6-12 months of your expenses, saved for a rainy such rainy days. You might think how can an emergency fund be useful during retirement, what’s its need? Let me explain this to you.

Retirement Emergency Fund should be equal to 14-18 months of your monthly expense can easily help you to ride out any high market volatility event beyond your comfort zone –you can stop withdrawing from your portfolio and instead withdraw from the emergency fund allowing your core portfolio to recover over time, helping your corpus last longer relative to withdrawing from your investment corpus during sharp downturns.

Even retirement practitioners recommend investors to build such emergency fund and suggest to invest the remaining corpus in Hybrid Funds, which will help you create annuity and beat inflation over long run.

However, if you don’t have this Retirement Emergency Fund, you can still sustain your corpus longer if you supplement it with a secondary income. I always talked about how spreading your corpus into three different buckets can help you earn inflation-adjusted amount even if you live beyond 100 years—the three bucket strategy of deployment and withdrawal (namely Conservative Hybrid, Aggressive Hybrid & Equities), you can sustain your corpus for longer even with a smaller corpus. Sounds Exciting?

Let me take explain this with an example here:

Suppose A has a retirement corpus of Rs 25 lakh while B has 50 lakhs, both are 50 years of age. They both withdraw 1% monthly (25k & 50k). The corpus of A sustains for infinity while B’s corpus lasts for 13 years. Why? It’s because “A” has a gig income of just 15,000 per month for a period of 13 years, which if he invests in the 3rd basket of Equity fund, will help to make his corpus last lifelong. See the table below:

*Inflation is assumed to be 4%. Returns assumed at 8.07% for Conservative hybrid (25% Equity: 75% Debt), 10.97% for Aggressive hybrid (75% Equity: 25% Debt), and 12.42% for Equities (Benchmark: CRISIL 10-year Gilt, Equity NIFTY 50, mean of 10 years ‘rolling returns between June 1, 2014 to May 31, 2024)

As people are living longer, the prospect of an extended retirement poses significant challenges. First is the risk of “Mongevity”— ability of your money last longer if you are lasting longer, which I believe the above strategy can help mitigating!

The risk of longevity also highlights the necessity for individuals to remain both mentally and physically occupied well into their retirement years – the second significant challenge during retirement and I believe having an alternate income can mitigate that. Our recent Retirement Readiness Survey 2023 also reveals that Indians are seeking various ways to add to their income by monetizing their passion and acquiring new skills to fuel their aspirations post-retirement. And with engaging in activities that one enjoys and then monetizing it not only adds purpose to life, but also offers numerous health benefits – mentally stimulating activities like learning new skills, volunteering, or pursuing hobbies keep the mind sharp preventing the cognitive decline and staying physically active with activities like walking, gardening, or yoga not only maintains physical health but also enhances overall well-being.

Embracing purposeful occupation in retirement not only mitigates the financial strain of longer lifespans but also enriches one's quality of life, fostering a sense of fulfillment and satisfaction. Having an emergency fund to ride the market corrections without disturbing the growth of our corpus and having a supplementary source of income which not only helps to engage yourself meaningfully (physically & mentally), but you also help to make your corpus last longer and gives you financial stability. Even better would be combining both strategies – good advisor can help you draw up a customized withdrawal plan for your retirement healthy, wealthy and stress-free retirement.

*This article was originally published in The Economic Times on 21st Feb 2024.

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