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53-Year-Old Plans Retirement: How to Generate Monthly Income?

Ramalingam Kalirajan |7888 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 26, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Joseph on Aug 14, 2024Hindi

Hello Sir, I am 53 years, planned for retirement in 3 years. Have MF investment about 80 lacs, FDs about 20 Lacs, will invest 50 lacs in the coming three years through investment in MF. I don’t have any loan, living in my own home. My monthly expenditure is Rs 65,000. How can I plan with the above corpus for my retirement so as get monthly payout? Whether to go for SWP - Balanced advantage funds or SWP- Debt funds for my monthly income? Is this correct plan? I will be needing 75,000 per month after my retirement. How much tax will I have to pay on 75,000 per month? Will there be any exit load while changing to S WP? What should be my investment strategy?

Ans: At 53, with retirement just three years away, you have a well-rounded financial foundation. Your assets include mutual funds (MFs) worth Rs 80 lakhs and fixed deposits (FDs) totaling Rs 20 lakhs. Additionally, you plan to invest Rs 50 lakhs in mutual funds over the next three years. Your monthly expenditure is Rs 65,000, and you anticipate needing Rs 75,000 per month post-retirement.

Let’s evaluate your retirement plan to ensure it provides the desired financial security and stability.

Monthly Income Needs After Retirement
Your monthly requirement of Rs 75,000 post-retirement translates to Rs 9 lakhs per year. Ensuring a steady and reliable income flow to meet these expenses is crucial. The focus should be on generating a regular income with minimal risk while considering tax efficiency.

Systematic Withdrawal Plan (SWP) Evaluation
An SWP allows you to withdraw a fixed amount from your mutual fund investments at regular intervals. You are considering SWPs from either Balanced Advantage Funds or Debt Funds. Let's assess both options:

Balanced Advantage Funds: These funds dynamically allocate assets between equity and debt. They offer a mix of growth potential and risk management. However, equity exposure introduces volatility, which might not be ideal for generating a stable monthly income in retirement.

Debt Funds: Debt funds primarily invest in fixed-income securities. They offer lower returns than equity-oriented funds but with much less volatility. Debt funds are suitable for generating a steady income with lower risk, which aligns with retirement goals.

Tax Implications
Understanding the tax implications on your withdrawals is crucial for efficient planning:

Capital Gains Tax: Withdrawals from mutual funds are subject to capital gains tax. For equity funds, long-term capital gains (LTCG) above Rs 1.25 lakh per annum are taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%. For debt funds, LTCG is taxed at 20% with indexation, and STCG is taxed as per your income slab.

SWP from Debt Funds: Since debt funds are less volatile, SWPs from these funds can provide a more predictable income stream. However, the tax on gains must be carefully managed.

SWP from Balanced Advantage Funds: The equity component can provide better tax efficiency for long-term gains, but the unpredictability of returns might not suit a retiree's income needs.

Given your retirement income needs, debt funds through an SWP may offer the most stable and predictable income while managing tax liabilities effectively.

Exit Load Considerations
Most mutual funds charge an exit load if you withdraw within a certain period, usually one year from the date of investment. Since you’re planning an SWP, which involves regular withdrawals, it’s important to choose funds with minimal or no exit load after the first year. Typically, debt funds and Balanced Advantage Funds have low or no exit load after one year, making them suitable for SWP.

Suggested Investment Strategy
Based on your situation, here’s a detailed investment strategy:

Diversify Your Corpus: Split your Rs 80 lakhs in MFs, Rs 20 lakhs in FDs, and Rs 50 lakhs future investment across different instruments to balance risk and return.

Invest in Debt Funds: Allocate a significant portion of your Rs 50 lakh investment in debt funds. This provides stability and ensures a steady income through SWP post-retirement.

Maintain a Balanced Approach: Consider Balanced Advantage Funds for a smaller portion of your corpus. This adds some growth potential while managing risk through dynamic asset allocation.

Emergency Fund: Keep a portion of your FDs as an emergency fund. FDs offer guaranteed returns and quick liquidity, which is essential for unexpected expenses.

Regular Review: Periodically review your investments. Adjust your SWP amounts based on inflation and changes in your financial needs.

Final Insights
Your planned retirement corpus and monthly income strategy are on the right track. However, prioritizing stability and tax efficiency is key. Using debt funds for your SWP will likely offer the most predictable income while minimizing volatility. Keep a balanced approach by mixing some exposure to Balanced Advantage Funds, but ensure that the majority of your retirement income comes from stable sources.

Finally, continue to monitor your expenses, review your portfolio regularly, and adjust as needed to ensure your retirement is financially secure and stress-free.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.