THE SIP FORMULA FOR MR. & MRS.RETIRED
Post Retirement period means a cautious outlook and conservative investments.
Given the inflation and longevity being the real challenges, it would be helpful to
leverage Equity MF in post-retirement period, keeping in mind:
1. Safety of principle
2. Beating Inflation
3. Tax savings
4. Leveraging Magic of Compounding
At this age, one often has either been fooled in to a poor investment or has lost
money in stocks. So naturally the attitude is ‘I don’t want equity’. What one should
try in this situation is to leverage the retirement corpus.
FD Interest = Equity MF SIP Formula.
Let’s say ‘Mr. & Mrs. Retired’ receive a pension that takes care of their expenses
and leaves a little bit of surplus. They also get some financial support from their
children and also receive lump sum money once in a while. They also have an
additional flat on rent. They combine these savings and convert these to FDs. They
can consider leveraging the Equity MFs in below manner:
1. They can invest in FDs with monthly interest pay-out and invest the monthly
interest amount in Diversified Equity MF SIPs. The capital is intact in FDs and
growth is invested in Equity MFs that can grow further
2. Let’s say that they are doing FD of Rs. 5,000 a month for a year @ 9% p.a. with
a cumulative interest option. From Month 13 onward, they will have FD
maturing every month for Rs. 5,450. They will also have the original FD Budget
of Rs. 5,000 p.m. on. The maturity interest of Rs. 450 can go in to SIP from month
13, to 24. From month 25-36, the maturity interest will be Rs. 900 and the SIP
budget can thus be increased. Here, with a same saving of Rs. 5,000 p.m.
every year, the FD investment as well as MF SIP will keep increasing and hence
both the FD and Equity MF kitty is growing, assuming no tax.
3. The rental returns in real estate are often around 3%. One tends to hold the
real estate even at this age in expectation of a capital gain. If there is no
dependency on the rental income, then this can be invested in Equity MFs.
4. Let’s say they would like to gift Rs. 5 Lakhs to their Grand Children. Again, a
better way can be to keep the capital with them via say Fixed Deposits and invest
the monthly interest pay out in Equity MFs in the name of Grand
Children. This will allow them to use the capital in case of any emergency.
5. Their Daughter keeps worrying about their financial support for last years. She
can invest a small amount of money in Equity MF via SIP and in 8-10 years this
can possibly grow to a sizable corpus.
How the retirement corpus gets utilized?
A typical post retirement period is likely to be ~25 years. Initial period is normally
comfortable with substantial corpus generating returns more than the expenses.
It’s only in the later years when the inflation catches up, the corpus returns are not
sufficient and hence one starts eating away from the corpus. Below diagram
explains this. So if one uses the initial 12 years or so in building Equity MF portfolio,
then this can generate a sizable corpus and it can come handy in later years.
Where to invest in Equity MFs?
Diversified Equity Mutual Funds are preferred. Given the low risk tolerance at this
age, one should look for Mutual Funds with low volatility and auto asset balance
structure. So one can start with investments in Hybrid Mutual Funds. These have
majority of investments in Debt component and a small component in Equity.
Once one becomes comfortable, then the Hybrid Mutual Funds with majority in
Equity component can be invested and then finally 100% Equity Diversified Funds
can be invested. Based on the age, one can also look at Index Funds.
Precaution
The Equity MF investments should be made for a period of at least 5 years. The
portfolio should be reviewed at least once in a six month. The taxation angle
should be kept in mind. As an example, the recent budget has increased the tax
rate and holding period for Debt Mutual Funds. Instead of FD, postal savings can
also be leveraged in a similar way. Before starting Equity MF investments, one
should revisit the cash flows and only use surplus funds.
Happy Investing
Source:Gettingyourich.com
Post Retirement period means a cautious outlook and conservative investments.
Given the inflation and longevity being the real challenges, it would be helpful to
leverage Equity MF in post-retirement period, keeping in mind:
1. Safety of principle
2. Beating Inflation
3. Tax savings
4. Leveraging Magic of Compounding
At this age, one often has either been fooled in to a poor investment or has lost
money in stocks. So naturally the attitude is ‘I don’t want equity’. What one should
try in this situation is to leverage the retirement corpus.
FD Interest = Equity MF SIP Formula.
Let’s say ‘Mr. & Mrs. Retired’ receive a pension that takes care of their expenses
and leaves a little bit of surplus. They also get some financial support from their
children and also receive lump sum money once in a while. They also have an
additional flat on rent. They combine these savings and convert these to FDs. They
can consider leveraging the Equity MFs in below manner:
1. They can invest in FDs with monthly interest pay-out and invest the monthly
interest amount in Diversified Equity MF SIPs. The capital is intact in FDs and
growth is invested in Equity MFs that can grow further
2. Let’s say that they are doing FD of Rs. 5,000 a month for a year @ 9% p.a. with
a cumulative interest option. From Month 13 onward, they will have FD
maturing every month for Rs. 5,450. They will also have the original FD Budget
of Rs. 5,000 p.m. on. The maturity interest of Rs. 450 can go in to SIP from month
13, to 24. From month 25-36, the maturity interest will be Rs. 900 and the SIP
budget can thus be increased. Here, with a same saving of Rs. 5,000 p.m.
every year, the FD investment as well as MF SIP will keep increasing and hence
both the FD and Equity MF kitty is growing, assuming no tax.
3. The rental returns in real estate are often around 3%. One tends to hold the
real estate even at this age in expectation of a capital gain. If there is no
dependency on the rental income, then this can be invested in Equity MFs.
4. Let’s say they would like to gift Rs. 5 Lakhs to their Grand Children. Again, a
better way can be to keep the capital with them via say Fixed Deposits and invest
the monthly interest pay out in Equity MFs in the name of Grand
Children. This will allow them to use the capital in case of any emergency.
5. Their Daughter keeps worrying about their financial support for last years. She
can invest a small amount of money in Equity MF via SIP and in 8-10 years this
can possibly grow to a sizable corpus.
How the retirement corpus gets utilized?
A typical post retirement period is likely to be ~25 years. Initial period is normally
comfortable with substantial corpus generating returns more than the expenses.
It’s only in the later years when the inflation catches up, the corpus returns are not
sufficient and hence one starts eating away from the corpus. Below diagram
explains this. So if one uses the initial 12 years or so in building Equity MF portfolio,
then this can generate a sizable corpus and it can come handy in later years.
Where to invest in Equity MFs?
Diversified Equity Mutual Funds are preferred. Given the low risk tolerance at this
age, one should look for Mutual Funds with low volatility and auto asset balance
structure. So one can start with investments in Hybrid Mutual Funds. These have
majority of investments in Debt component and a small component in Equity.
Once one becomes comfortable, then the Hybrid Mutual Funds with majority in
Equity component can be invested and then finally 100% Equity Diversified Funds
can be invested. Based on the age, one can also look at Index Funds.
Precaution
The Equity MF investments should be made for a period of at least 5 years. The
portfolio should be reviewed at least once in a six month. The taxation angle
should be kept in mind. As an example, the recent budget has increased the tax
rate and holding period for Debt Mutual Funds. Instead of FD, postal savings can
also be leveraged in a similar way. Before starting Equity MF investments, one
should revisit the cash flows and only use surplus funds.
Happy Investing
Source:Gettingyourich.com
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