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Choose Equities, RDs For Long-Term, Emergency Cash Needs; Apply Bucket Strategy Post-Retirement, Says Expert

Financial planning is vital both during the accumulation and retirement phases, so depending on your financial needs, formulate a strategy that serves you best.

June 22, 2024
June 22, 2024
Financial planning

Financial planning

I am a 58-year-old man in corporate service and is heading towards retirement soon. I have Rs 30 lakh in my provident fund savings. How can I maintain a steady cash flow to support my expenses throughout my retirement? What strategies and investment options should I consider to ensure my savings last, considering inflation, healthcare, and other potential financial needs?

Ans. Given that you will be dependent entirely on your provident fund savings, it is important to prioritise capital preservation. You can use a bucket strategy to segment your provident fund savings into different buckets and invest accordingly. The first bucket relates to safety and should be able to fund your living expenses for the next 10 years. You can calculate your annual expenses, multiply this number by 10, and keep this amount in fixed deposits as the first bucket. Once this first bucket relating to safety has been funded, the balance can be invested in riskier assets to try and grow the retirement kitty.

This second bucket, which can be called the growth bucket, can be invested in balanced advantage or hybrid mutual funds that provide equity exposure along with the safety of debt investments. As the years roll by, and the first bucket depletes due to expenses, gains from the second bucket can be transferred to replenish the first bucket. This is a typical way retirees use their retirement portfolios to get the best of both safety and future growth.

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I am a 25-year-old woman working in the private sector. I earn a fixed income of Rs 50,000 monthly. In the next appraisal cycle, my CTC will likely increase by a mere 20 per cent. Given that I manage all my needs in the current salary, how should I invest the surplus I will gain every month with the hike? I want to invest in safer assets like mutual funds, blue chip stocks, and fixed deposits, but I am unsure. What would be the best investment option for long-term growth?

Ans. Given that you are young, you have an excellent investing runway ahead of you. If you use this runway appropriately, you can harness the power of compounding to generate long-term wealth. Given that most of your financial goals, like retirement, are potentially long-term goals, you can invest in equity mutual funds. It is important to take exposure to a growth asset class like equities to generate long-term wealth. Along with equity mutual funds, you can also invest in recurring deposits to build an emergency corpus. This emergency corpus will absorb any unplanned expenditures so that we do not disturb the compounding of the equity investments.

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My father, who is set to retire in 3 years from a state government job, will have around Rs 40 lakh from his provident fund. He will also get about Rs 24 lakh in gratuity. Since he will have at least Rs 64 lakh after retirement, how should he invest this money? His monthly in-hand salary now is Rs 1.8 lakh after deductions like the General Provident Fund (GPF) and EMIs for a Rs 10 lakh home loan we took this year. Since he wants me to diversify his retirement corpus, where and how should I invest the funds and should I keep a portion for loan repayment?

Ans. An appropriate withdrawal rate to target in India for a retiree retiring at age 60 is 3 per cent. Since your father will have a retirement corpus of Rs 64 lakh, the annual withdrawals in the first year of retirement should be approximately Rs 2 lakh. However, it is a good idea to repay the loan. Hence, part of the retirement corpus can be used to repay the loan within 12 months. After loan repayment, the retirement withdrawals will come down, but at the same time, there will be savings in interest costs. The target asset allocation strategy should be 40 per cent in equities, 50 per cent in fixed income and 10 per cent in gold.

For equity allocation, it is recommended to use large-cap equity mutual funds—a mix of index funds and a few active funds can be used. For fixed-income exposure, we can use a mix of fixed deposits and debt mutual funds. Within debt mutual funds, it is recommended not to take credit risk or interest rate risk. Hence, ultra-short-term funds or liquid funds should be used. Gold exposure can be taken through sovereign gold bonds (SGBs) or gold mutual funds.

The author is a CFA, a Sebi-registered investment adviser (RIA), and co-founder of www.samasthiti.in, a financial advisory platform.

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