Skip to main content

Retirement Planning: Need monthly cash flows

Investment portfolios are constructed to meet future liabilities. Such liabilities range from buying a house and paying children`s tuition fees to creating endowments and meeting post-retirement lifestyle. Several investors in the recent past have asked us about post-retirement portfolios. The question is: How should one create a post-retirement portfolio that generates monthly cash flows?

This article discusses the retirees` need and the desire to generate monthly cash flows. It also explains investment avenues available to non-pensioners to generate income that replicates pension payoffs.

It is true that retirees have to match their expenses with appropriate income. But it is moot if they necessarily require monthly cash flows from the investment portfolio to enjoy their desired post-retirement lifestyle.

Suppose an investor receives a pension of Rs 5,000 a month. This approximately equals receiving cash flows of Rs 65,000 a year on a deposit of Rs 8.60 lakh carrying 8% interest. Essentially then, those who receive pension income already have bond-like cash flows. Creating a portfolio that generates monthly income would only mean even greater exposure to bonds as an asset class.

This is not true for non-pensioners. They have to generate some monthly cash flows to replicate pension payoffs. Their portfolios have to, therefore, carry sufficient bond assets to generate the required monthly income.

Now, asset allocation is essential for lifecycle investment. This means that even retirees should have some allocation to equity-like cash flows to generate higher returns. Otherwise, their portfolio will suffer from inflation risk. This is because bonds pay nominal interest rate and, hence, do not protect the retiree-investors from rising price levels.

It is important to understand that a post-retirement portfolio should contain assets that generate income as well as capital appreciation. The monthly cash flows would then come from interest, dividends and through sustainable withdrawals from the investment portfolio.

Investors have several ways to creating a portfolio generating monthly income. Many prefer Post Office Monthly Income Scheme (POMIS) offered by the Government. The problem is that POMIS by itself cannot provide the required total monthly cash flow because of an investment cap of Rs 0.45 million for each account. The investment cap translates into approximately Rs 3,000 a month based on the interest rate of 8% a year.

Investors can consider annuities along with POMIS. Such products can be purchased from insurance companies, which entitle the annuitant to receive stable cash flows through their life time. Of course, annuities are priced off the interest rate prevailing at the time of purchase; higher the interest rate, higher the cash flow that the investor will receive for the amount paid to purchase the annuity.

Besides, investors have Monthly Income Plans (MIPs) offered by asset management firms. Such funds predominantly invest in bonds and money market instruments to make monthly payments. These funds will be exposed to price risk to the extent the portfolio has exposure to short-term and long-term bonds and to equity.

It is important to note that fixed deposit with banks is not considered, as they do not provide investors with monthly cash flows. Some investors even take exposure to high dividend-yield stocks to generate monthly income. The problem is that such investments suffer high downside risk, unlike POMIS.

Conclusion

The urge to receive monthly cash flows from investment portfolio is high among retirees. This article shows why pensioners should resist this urge, as pensions have bond-like cash flows.

Non-pensioners should consider annuities, POMIS and MIPs as part of the investment repertoire to replicate pension payoffs. The proportion of the portfolio to each product would depend on investors` desired post-retirement lifestyle and risk tolerance level.
Even post-retirement portfolio should carry optimal allocation to equity and bonds, if not other asset classes. Such a portfolio would help retirees enjoy inflation-adjusted post-retirement lifestyle.

 

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

What is Financial Freedom?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     There were many things common between our Freedom fighters. All had the Single vision (Free India), common goal (independence) and had a disciplined and focused approach. They were ready to do anything and everything and had made so many sacrifices to see India free . But the road to freedom was not easy .They had faced lot many hardships, went to jail so many times and even confronted physical and mental torture from the British. There was one more thing which proved to be an advantage to our fighters that most of them were professional lawyers. The knowledge of legal issues and its impact on our country at large has helped them counter various bills and proposed new laws by the then government. It is due to their continuous effort that we are able to achieve the goal of Independent Indi...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now