Most investors dedicate a fair amount of time and energy into drawing up a doable plan when saving for retirement. Rightly so. But if you think saving for retirement is an ordeal, you have not given adequate thought to the post retirement scenario.
Once you have built your investment portfolio, your focus needs to shift on how to best convert your accumulated financial resources into a cash flow. To be more explicit, figuring out how to consistently obtain a periodic amount from your savings is a much bigger challenge.
There are two things you should do to your savings in retirement.
1) Try to make your savings last as long as possible.
One cannot have a myopic view when looking at retirement. It is not an event which is an end in itself. It is the start of another phase in your life where the cash flow will no longer come from your monthly paycheck.
Let’s say you decide to retire at the age of 60. There is a high possibility that you could be alive for the next 25 years. During this period, you will deal with medical bills and a cost of living that only goes higher.
So the conventional wisdom of offloading all your equity holdings before you retire and getting into fixed income is not the best solution. Your portfolio must be given the opportunity to grow. You cannot afford to ignore equity at this stage.
2) Tap your savings to create an income stream.
This is obvious.
Since you no longer earn a regular monthly salary, money has to come from somewhere else. Most investments are designed to provide some form of income. Your income stream could take the shape of interest payments from your fixed deposits/bonds, dividends from your mutual funds/stocks, an annuity plan, rental income, or a pension from your erstwhile employer.
There is another avenue which services both the above criteria; a Systematic Withdrawal Plan, or SWP.
To build wealth over the long haul, some amount of equity exposure is a must. As mentioned above, liquidating your entire portfolio of accumulated equity assets is not the smartest thing to do. Instead, you should keep some amount of your money invested in a large-cap or balanced fund. Then, by opting for a SWP, you can get a periodic flow of cash. This would serve the dual purpose of helping your capital grow over the years as well as provide you with income.
A SWP is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. This generates an additional cash flow without the need for liquidating your entire investment.
How does it work?
When you automatically take money out of your mutual fund on a regular basis (fortnightly, monthly, quarterly), it is called a systematic withdrawal. At the set, predetermined date, units from your fund are sold and the money is sent to your bank account. All very convenient.
Start by picking up a good fund.
Once you do so, you can put in a lumpsum investment. From that investment, you can opt for an SWP. Alternatively, pick a fund to systematically invest in over a number of years, an SIP in other words. Once you retire, stop the SIP and opt for an SWP.
When opting for an SWP, you have to decide whether you want to withdraw a specific amount or an appreciated amount. Also choose the periodicity of the withdrawal, such as quarterly or monthly.
Once you settle on those parameters, you are dusted and done.
In the coming posts under ‘Solutions’ we shall discuss the SWP in more detail.