How much to set aside for retirement?

You must necessarily create a stable income stream to meet your monthly expenses

If you are close to your retirement date, you should be excited and nervous at the same time! Excited because you can finally have more leisure time than ever before. And nervous because you are entering a phase of your life where cash flow management becomes important. After all, you will have to depend only on passive income to manage your lifestyle needs. In this article, we discuss certain important aspects about your post-retirement cash flows that will make you less nervous about your retirement.

Spending patterns

If you are spending, say, ₹1 lakh per month and are due to retire in five years, you may be wondering as to whether you would be able to generate the same level of income during your retirement to sustain your lifestyle. Fortunately, you do not need ₹1 lakh per month through your retired life! Why?

If your monthly expenses are high, it is, perhaps, because your discretionary spending is high. Discretionary spending refers to non-essential spending such as fine dining and entertainment. True, you are likely to have more discretionary spending during your retired life than before; more leisure leads to more discretionary spending.

But your discretionary spending will be high only during the first 5-10 years of your retired life. It is unlikely that you will be excited to go to a fine dining restaurant every week after, say, age 70. So, your retirement income portfolio need not generate ₹1 lakh per month through your retirement; you might have to replace, say, only 70-75 per cent of your working income in your retired life.

Another concern is about health care. But should it be? Our health will deteriorate suddenly, not gradually. This means you and I will be healthy for most part of our life, and then, our health will decline sharply. You do not know whether you will incur non-recurring health-care costs such as heart surgery during your retired life. Hence, such costs can be either very high or insignificant. And you may typically not need it till you cross 75. But what if you do? You should always have a health insurance policy to meet such non-recurring costs. And in the event of unforeseen critical illness, you should use your real estate as the last resort. You could raise money using real estate as collateral. Or you could use a reverse mortgage line of credit to meet such costs. Your normal health-care costs can be covered through your non-discretionary monthly expenses.

Synthetic pension

We now address one important issue relating to your investment decisions. You should necessarily create a stable income stream to meet your monthly expenses. Why? All your working life, you spent most of your current income and saved the rest. And when it came to buying a house or admitting your child to college, you sold your investments and funded the cost. But never did you spend your investment gradually over a period of time. So, gradually spending your retirement savings is not a natural process. Additionally, your retirement life does not have a definite time horizon. So, you may have an issue at hand, for most individuals are uncomfortable spending their retirement savings!

But what if you do not consume your retirement savings? It is behaviourally optimal to consume income and keep the income-earning asset intact. You can do this by investing in an instrument that gives you regular monthly income such as monthly-income bank deposit. In this case, the investment capital can be passed-on to the next generation as legacy portfolio after both your and your spouse’s lifetime. So, whether it is about health-care cost or income stream, don’t let retirement overwhelm you. You have enough flexibility to create a comfortable retired life.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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