How to make your nest egg last a lifetime

A retirement corpus of 1 crore seems big but won’t be able to sustain expenses of 50,000 a month due to inflation. Here’s what retirees can do

• The Times of India (New Delhi edition)
• 30 Sep 2019
• BABAR ZAIDI YEAR

MONTHLY EXPENSE Relies on annuities, debt options that give assured returns

One of the biggest challenges that retirees face is how to make their retirement savings last a lifetime. Even if one has saved diligently throughout one’s working life and accumulated a sizeable nest egg, it may not be able to generate enough to sustain monthly expenses over the long term. This is largely due to three factors: longer life spans, early retirement and falling interest rates.

According to a report of the UN Population Fund, life expectancy at birth in India has risen from 60 years in 1994 to 69 years in 2019. That’s the average. Lifespans are longer in urban centres with medical facilities and among socio-economic classes that can access them. It is not uncommon to see people in their 80s and 90s, and things will only get better in future. So, the average upper middle-class urban retiree must have enough to last 20-25 years in retirement instead of 15-20 years earlier. At the same time, it is now common for people to leave full-time employment in their early fifties. They have fewer years to accumulate their nest egg and more years to spend it.

Meanwhile, interest rates of fixed income options have come down and the investment landscape has changed drastically. Fixed deposits are offering senior citizens around 7% returns. The Senior Citizens’ Saving Scheme, the most lucrative option for retirees in the small savings stable, currently offers 8.6% but this could soon change. Small savings rates are linked to government bond yields and are reset every three months.

How can retirees earn sufficient income in their golden years without taking undue risks? We have identified three options: the traditional approach that relies solely on fixed income options, a moderate approach that takes a little risk and the bucket strategy that financial planners suggest. Read on to know how the three strategies use a corpus of 1 crore to generate monthly income of

50,000 in retirement.

1 crore enough?

of the investor on his death. If he wants his legal heirs to get back the principal amount of 1 crore, he will have to settle for a lower income of around 52,000 per month. That sounds good enough, right?

Wrong. A pension of 52,000 might be sufficient today but won’t remain so forever. Inflation pushes up your expenses with each passing day. Even a moderate inflation rate of 6% per annum will take the monthly expense to 90,000 a month in 10 years and to 1.6 lakh in 20 years (see graphic). In other words, in 20 years, the pension from the annuity will be able to purchase barely a third of what it can purchase today. Somebody who has not

2.2 lakh

Once you retire, your "nest egg" replaces your job as a key source of income to cover your expenses. You could live to age 85, 90 or older, and inflation will always be a factor. It takes some planning to make sure you can pay your bills now while also saving enough so that decades down the road, you'll have enough money. 

The 4 Percent Rule

A widely used rule of thumb is to draw 4 percent of your nest egg each year as income. The idea is that your investment portfolio will grow by more -- say, 6 to 7 percent annually. Your account will grow, and the 4 percent slice will increase each year to keep up with inflation. Consider whether annual returns of 6 to 7 percent are a valid assumption based on your investment choices, and what to do for the years your portfolio doesn't grow at least 4 percent. Depending on the size of your nest egg and your current expenses, a more conservative 3 percent withdrawal rate might work.

Stocks As Well As Bonds

For a nest egg to grow and provide a higher income in future years, it is very likely that part of your portfolio needs to be invested in stocks. Sticking with a 100 percent bond portfolio might pay enough income now, but that income probably wouldn't keep up with inflation. And lower bond rates in the future would be a double hit -- along with inflation -- on your retirement income. In spite of the volatility of the stock market, stocks are the best assets for growth in your nest egg, and the higher values can be converted into a bigger retirement income. The 30 to 40 percent of your nest egg in the stock market can be in the form of mutual funds or exchange-traded funds.

Buckets of Money

An article in "Kiplinger" magazine discusses the strategy of dividing your nest egg into buckets. One bucket is money set aside to pay for off-budget expenses such as car repairs or a vacation. Another account is two to three years worth of monthly expenses, kept in a very stable investment account. You can draw from this account without worrying whether the markets are up and down. The rest of your nest egg is in longer-term investments. When nice gains are earned, a portion of them are transferred into the stable account.

Managing Your Budget

An important part of making your nest egg last is to have a budget that lets you live within the income your investments can safely provide. If your expenses when starting retirement are low enough to not put stress on your nest egg, your investment portfolio will be better able to handle higher future costs. Other income sources, such as Social Security or a pension, will be part of the budgeting process.