How To Make Your Money Last A Lifetime
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04 Sep, 2018
Post retirement, a retirees main fear is of his/her money getting over. So, how do you ensure that your money lasts your lifetime?
Last month in our post ‘Is your Retirement Corpus enough?’ we took the example of Mr. Mehta, a retiree who even with a portfolio of Rs. 1.2 crore invested in Fixed Deposits, Bonds, Non-Convertible Debentures and Postal Schemes, would wipe out his entire Retirement Corpus by the time he is 78 years of age. Let’s see how with appropriate Asset Allocation Mr. Mehta can make his money last longer.
The classic mistake Mr. Mehta made was to ignore inflation. His investments gave him returns of only 5.78% p.a. that is much lesser than inflation of 7% p.a. The solution to ensuring your Retirement Corpus lasts your lifetime is to build an investment portfolio with an Asset Allocation that can beat inflation.
When Mr. Mehta approached us for building his Retirement Corpus, we recommended him a portfolio with an ability to deliver returns of 9.48% p.a. thereby beating inflation by at least 3% p.a.
|Income Need Increasing @ 7% p.a. due to inflation||6 Lakh||6.42 Lakh||62||17.71 Lakh||18.95 Lakh||20.28 Lakh||79||28.44 Lakh||30.43 Lakh||32.56 Lakh|
|Current Investments growing @ 5.78% p.a (Post Tax)||120.59 Lakh||120.78 Lakh||to||20.96 Lakh||2.12 Lakh||0||to||–||–||–|
|Recommended Investments growing @ 9.48% p.a. (Post Tax)||124.80 Lakh||129.60 Lakh||75||160.85 Lakh||155.34 Lakh||147.85 Lakh||85||69.43 Lakh||42.69 Lakh||11.08 Lakh|
As you can see in the table above, while his current investments will last him only till the age of 78 years, by following the Investment Strategy that we recommended, his investments will generate income enough to last him till he is 85 years.
|Goals||Category||Amount||Return post tax||Portfolio (%)|
|Emergency Fund||Bank FD||3 Lakh||5.00%||2.50%|
|Health Corpus||Bank FD & Balanced MF*||12 Lakh||8.00%||10.00%|
|1st Year Income||Bank FD / Arbitrage MF*||6 Lakh||5.00%||5.00%|
|2nd Year Income||Bank FD / Arbitrage MF*||6 Lakh||5.00%||5.00%|
|3rd Year Income||Bank FD / Debt MF*||6 Lakh||5.00%||5.00%|
|4th Year Income||Debt MF*||6 Lakh||7.50%||5.00%|
|5th Year Onwards||Balanced MF*||81 Lakh||11.00%||5.00%|
*MF = Mutual Funds
So, by tweaking his Asset Allocation, Mr. Mehta will not only have steady income till he is 85 years, but will also build a considerable Emergency Fund and Health Corpus.
|Cash Equivalent||27 Lakh||22.50%|
As you can see above, by allocating his Retirement Corpus of Rs. 1.2 crore to various investment avenues keeping in mind his needs, Mr. Mehta can achieve his financial goals and be stress-free about his money. It is important to allocate your money in investment avenues as per your risk appetite. Since Mr. Mehta does not have a very high risk appetite, we allocated only 47.13% of his portfolio to Equity. To make his money last longer he can increase his Equity Allocation.
You too can build a Retirement Corpus to meet your needs and ensure your money lasts your lifetime by appropriate Asset Allocation.