Efficient Solution for Regular Income post-retirement

retirement2

This article is important for persons who have retired or would be retiring soon. Please share this article with your friends/colleagues/relatives, if you think this article is relevant to any of them.

Post-retirement years are believed to be the golden period in life.

Everyone retires some day and has to live post-retirement life in peace pursuing one’s hobbies, passions, playing with grand children, meeting old friends etc.

Post-retirement we don’t get salary. We need to convert our assets to financial assets, which can generate regular income.

Various options to get regular income post-retirement are:

  1. Buying pension plans
  2. Depositing money in Fixed deposit and using the interest for monthly expenses
  3. Buying a property and using the rent from the property for monthly expenses
  4. Investing in a Balanced Mutual Fund and withdrawing fixed amount every month through SWP option

I will explain the 4th option in this mail and will explain why it is more efficient than other options.

SWP stands for Systematic Withdrawal Plan. Through this plan, you can invest a lumpsum amount in a mutual fund scheme and withdraw fixed amount (which is decided by you as per your requirement) every month.

Lumpsum amount can be invested in a Balanced Mutual Fund scheme as these schemes are less volatile than equity mutual funds and gives better returns than Fixed deposits or pension plans or rental yield (Rent p.a is approx. 3 – 4% of property value). These schemes are not taxable, which is another big advantage.

Lets consider an example with ICICI Prudential Balanced Advantage Fund.

This scheme has delivered the following returns in the past.

Scheme name Average return p.a in

last 3 years

Average return p.a in

last 5 years

ICICI Prudential Balanced Advantage Fund 18% 16.85%

I will assume that the expected rate of return from the above scheme is 12% p.a conservatively.

Now, let us look at different scenarios by investing different lumpsum amounts and withdrawing different amounts p.m.

  1. Initial investment: Rs. 50 Lakh; SWP amount: Rs. 30000 (withdrawal amount p.m)
Initial investment Rs. 50,00,000
Expected rate of return p.a 12%
Amount withdrawn p.m for expenses Rs. 30,000
No. of yrs 20
Value of initial investment after 20 yrs Rs. 2,44,88,331
Total amount withdrawn in 20 yrs Rs. 72,00,000

2. Initial investment: Rs. 40 Lakh; SWP amount: Rs. 25000 (withdrawal amount p.m)

Initial investment Rs. 40,00,000
Expected rate of return p.a 12%
Amount withdrawn p.m for expenses Rs. 25,000
No. of yrs 20
Value of initial investment after 20 yrs Rs. 1,85,91,517
Total amount withdrawn in 20 yrs Rs. 60,00,000

   3. Initial investment: Rs. 30 Lakh; SWP amount: Rs. 20000 (withdrawal amount p.m)

Initial investment Rs. 30,00,000
Expected rate of return p.a 12%
Amount withdrawn p.m for expenses Rs. 20,000
No. of yrs 20
Value of initial investment after 20 yrs Rs. 1,26,94,703
Total amount withdrawn in 20 yrs Rs. 48,00,000

    4. Initial investment: Rs. 25 Lakh; SWP amount: Rs. 20000 (withdrawal amount p.m)

Initial investment Rs. 25,00,000
Expected rate of return p.a 12%
Amount withdrawn p.m for expenses Rs. 20,000
No. of yrs 20
Value of initial investment after 20 yrs Rs. 72,48,426
Total amount withdrawn in 20 yrs Rs. 48,00,000

By investing in Balanced Mutual Fund and starting SWP, one can get regular income as well as appreciation in the invested amount as Balanced mutual funds deliver 4 – 5% more than an FD with less volatility than an Equity Mutual Fund. Interest on FD is taxable whereas profit / appreciation made in Balanced mutual fund is not taxable. Hence, dual advantage of more returns + NO TAX

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