Retirement Planning: How much can I safely withdraw monthly from my 3.3cr corpus?

Ans: You have successfully built a well-rounded portfolio across various asset classes. As you are planning for a stable withdrawal phase while ensuring your wealth continues to grow for your children, let's take a detailed look at your portfolio and develop a strategy that offers growth, safety, and consistency.

Here’s a breakdown of your current investments:

Rs 1.13 crore in PPF accounts (your and your wife’s accounts).
Rs 90 lakhs in mutual funds.
Rs 60 lakhs in direct stock investments through smallcase.
Rs 22 lakhs in a trading account for swing trading.
Rs 45 lakhs in fixed assets.
You are now looking to ensure that, after 8 years, you can withdraw a safe monthly amount while ensuring that your portfolio continues to grow to secure your family’s future.

Let’s discuss each part of your portfolio, evaluate its advantages and risks, and arrive at a sustainable withdrawal strategy.

1. Evaluating Your PPF Investments
Public Provident Fund (PPF) is a solid foundation for any portfolio, especially for investors seeking low-risk, long-term growth. Currently, the PPF offers an interest rate of 7.1%, which is tax-free.

Advantages of PPF:

Guaranteed returns: The government backs PPF, so there is no risk of capital loss.
Tax benefits: Both contributions and maturity proceeds are tax-exempt.
Low-risk: It provides a safe option to preserve your wealth.
Growth Estimate: Assuming you do not make additional contributions, your current Rs 1.13 crore in PPF will continue to grow at 7.1%. After 8 years, this amount could grow to around Rs 1.94 crore, providing a safe and steady portion of your overall portfolio.

Since PPF is a conservative option, it offers safety. However, you may not want to rely solely on it for growth, as its returns are relatively lower than equity-based options.

2. Assessing Your Mutual Fund Investments
With Rs 90 lakhs in mutual funds, you are already participating in market-linked growth opportunities. Mutual funds, especially actively managed ones, tend to outperform other investments like fixed deposits over the long term.

Advantages of Mutual Funds:

Diversification: Mutual funds invest in a wide array of stocks, reducing the impact of any single stock’s poor performance.
Professional management: Fund managers actively manage the portfolio to maximize returns.
Liquidity: Mutual funds are easy to redeem, offering flexibility.
Growth Potential: Assuming a 10% average annual return (which is common for equity mutual funds over the long term), your Rs 90 lakhs could grow to Rs 1.94 crore after 8 years.

By investing regularly in mutual funds and sticking to your SIP strategy, you will continue to build a strong financial base.

3. Direct Stock Investments via Smallcase
You have allocated Rs 60 lakhs to smallcase investments. Smallcase offers curated baskets of stocks based on certain themes or ideas, which makes it attractive for investors looking to gain exposure to specific sectors or strategies. While smallcase offers convenience, there are some limitations when compared to smallcap mutual funds.

Disadvantages of Smallcase:

Higher risk due to concentration: Smallcase portfolios tend to be more focused on specific sectors or themes. This can lead to higher volatility compared to diversified mutual funds.
Active management burden: Unlike mutual funds, smallcase portfolios are not actively managed by professionals on a daily basis. You will need to monitor and rebalance the portfolio regularly.
Transaction costs: Every buy or sell order in smallcase comes with a brokerage fee, adding to the overall costs. In mutual funds, transaction costs are embedded in the expense ratio.
Comparison with Smallcap Mutual Funds:

Smallcap mutual funds pool money from many investors and invest in small-cap stocks while managing risk through professional expertise.
Risk management: Smallcap mutual funds tend to be more diversified within the small-cap space, reducing the overall impact of a single stock underperforming. Smallcases can be much more concentrated, which increases the risk.
While smallcase can provide decent returns, its risk is higher. It may be worth considering increasing your allocation to smallcap mutual funds for the benefits of diversification, professional management, and potentially lower volatility.

4. Swing Trading and Its Risks
You also engage in swing trading, with Rs 22 lakhs in a trading account. Swing trading aims to capitalize on short-term price fluctuations, and while it can generate higher returns over the short term, it carries substantial risks.

Disadvantages of Swing Trading:
High risk and volatility: Swing trading is speculative and depends heavily on market timing. Markets can be unpredictable, and even experienced traders can face significant losses.
Emotional decision-making: Swing trading often requires quick decisions, which can lead to emotional and irrational trades, especially during market volatility.
Short-term capital gains tax: Profits from swing trading are subject to short-term capital gains tax, which is 20% on equity-based instruments. This reduces your net returns significantly.
Time-intensive: Unlike long-term investing, swing trading requires constant monitoring of the markets and stocks. This can be stressful and time-consuming.
Swing trading can be lucrative in the short term, but the risks associated with it are high. As you are planning for a long-term, stable withdrawal strategy, it might make sense to limit swing trading and shift more of your portfolio towards long-term, safer investments like mutual funds or PPF.

5. Other Fixed Assets
You hold Rs 45 lakhs in fixed assets. Fixed assets are typically illiquid, which means they may not provide you with regular income unless they are rented or otherwise income-producing. While these can appreciate over time, their illiquidity means they may not be ideal for generating monthly withdrawals in retirement.

Safe Withdrawal Strategy After 8 Years
After 8 years, you are looking to withdraw a safe monthly amount from your portfolio without depleting it. Let’s calculate a strategy that allows for sustainable withdrawals while ensuring your portfolio continues to grow.

Estimating Your Portfolio’s Future Value
PPF: Rs 1.13 crore growing at 7.1% annually will become Rs 1.94 crore in 8 years.
Mutual Funds: Rs 90 lakhs growing at 10% annually will become Rs 1.94 crore in 8 years.
Direct Stocks (Smallcase): Rs 60 lakhs growing at 10% annually will become Rs 1.29 crore in 8 years.
Swing Trading: For swing trading, it’s more complex to estimate returns due to the speculative nature. Let’s conservatively assume this grows at 8%, turning Rs 22 lakhs into Rs 40 lakhs in 8 years.
This gives you a total portfolio value of approximately Rs 5.57 crore after 8 years.

Sustainable Withdrawal Rate (SWR)
A commonly recommended safe withdrawal rate is 4% per year. This allows your portfolio to grow while providing a steady income. Here’s how that works:

Total portfolio: Rs 5.57 crore
Annual withdrawal: 4% of Rs 5.57 crore = Rs 22.28 lakhs
Monthly withdrawal: Rs 22.28 lakhs divided by 12 = Rs 1.85 lakhs per month.
With this strategy, you can withdraw Rs 1.85 lakhs per month after 8 years while ensuring that your portfolio continues to grow.

6. Long-Term Wealth Preservation for Your Children
After you and your wife, you want your wealth to continue growing safely for your children. Here are some steps to ensure that:

Increase allocation to safer assets: As you approach retirement and beyond, you may want to shift a portion of your portfolio from volatile assets (like stocks and swing trading) into safer options, such as mutual funds, PPF, and debt instruments.
Estate planning: Ensure you have a well-drafted will and estate plan in place. This will ensure your wealth is passed on to your children in a tax-efficient and hassle-free manner.
Minimise risks as you age: Gradually reduce exposure to high-risk investments like swing trading. Consider focusing more on growth-oriented but stable investments like mutual funds.
Diversify within mutual funds: Continue with your SIP investments and aim for diversification across large-cap, mid-cap, and small-cap funds for balanced growth.
Finally
Your portfolio is well-diversified, and you are on a solid path to achieving your financial goals. By focusing on long-term growth and maintaining discipline in your investments, you can ensure a steady and safe withdrawal strategy. While swing trading and smallcase investments may offer short-term gains, consider balancing the risks with more stable, professionally managed investments like mutual funds.

With a safe withdrawal rate of 4%, you can comfortably withdraw Rs 1.85 lakhs per month after 8 years, while ensuring your wealth continues to grow for your children.

Best Regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment