Except for the lucky few who have enough wealth, no one is without concern about what happens when you stop earning. Fear of the unknown is always present.
We all know elderly people who are struggling to meet all their financial obligations. When a person does not have enough money, life becomes difficult.
Relying on traditional deposits for interest income
Many retirees go through a cycle of overspending and underspending. When the wage earner retires, he or she receives this amount of money, which can be in between ₹50 i ₹60 lakhs. It seems to be a considerable sum. That’s almost certainly more than the retiree ever received in one lump sum in their lifetime. They believe they have unlimited spending power. Many investors assume ₹50 lakh is a big sum and hence withdraw an equal amount every month without realizing that the money will last them for a limited period. An alternative way would be to set it aside ₹15 lakhs and put the rest ₹35 lakhs in fixed deposit for five years. This way they can pay themselves ₹25000 every month for five years, at the end of which they would have a little over ₹48 lakhs. Then they can separate again ₹15 lakh to earn monthly pension income ₹25,000 with retention of the remaining ₹33 lakh in fixed deposit. In this way, the cycle continues even though it is broken by the lack of itself ₹25000 every month to pay expenses, not considering the continuous devaluation of money.
Some may invest their money in the Senior Citizen Savings Scheme (SCSS) to earn a quarterly interest of eight per cent per annum. However, given the impact of inflation on the cost of daily living, would these investment methods be sufficient to pay for a retired life expectancy of 30 years or more?
The above assumptions are just hypotheses drawn to draw attention to inadequate retirement planning. To begin with, the pensioner corps do ₹60 lakh is simply not enough to sustain the remaining years of life, especially when there is no income and increased susceptibility to hospitalization and treatment. The tendency to stick with traditional investment options after retirement lies in the firmly held belief that the retirement corpus should be invested in 100 percent safe options. That “safety net” is all most are looking for and it is this mindset that has driven many retirees to rely on their relatives for money or necessary finances during emergencies.
Deciding on a monthly withdrawal
Besides, the concept of a “safety net” is a misnomer and can be labeled as nothing more than a “deception”. By understanding how inflation can hit our savings and affect our earnings in the long run, it makes sense not only to choose the right investment options after retirement, but also to decide on the amount of corpus we have to withdraw without losing the entire amount. expenditure and inflation. At the current rate of inflation, we would need four times as much money to pay our daily living expenses, necessitating the need not only to cash in the accumulated corpus to earn more money, but also to allow for larger withdrawals during the golden years of life. Estimating how much you would need can be as taxing as estimating how much you need to withdraw each month to live comfortably.
How much money do you need to withdraw each month?
It’s not rocket science to decide how much to save, invest and withdraw to avoid depleting your retirement corpus. Common sense dictates how we must decide to withdraw based on the interest rate income on our savings and the corresponding rate of inflation. You withdraw only what your savings earn over and above the rate of inflation to support the inflation-adjusted withdrawal rate. Think about it carefully. You should not withdraw more than one percent of the corpus every year only if your savings earns eight percent and inflation earns seven percent. This will ensure that your savings grow at least in line with inflation, preventing you from losing all your money in old age.
Eight percent returns from debt funds or other investment opportunities may not be enough, suggesting the need to put some money into stocks as well. However, equity investments must continue for at least five to seven years to meet medium-term financial goals and more than a decade to achieve long-term financial goals.
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First published: January 17, 2023, 7:57 am IST