The second phase of retirement planning is tougher than the first phase. Also very less is written about this phase. This is the phase when we survive on our financial capital.
Individuals have two forms of capital - human capital and financial capital. Many of us who work to generate income are human capital. Second form of capital is financial capital. Financial capital is our savings and investment.
We start our career as human capital. Over a period of time we save/invest and create financial capital. When we retire we only have financial capital. We remain human capital as long as we keep working.
Moment we cease to work we become dependent on our financial capital. In most cases our human capital is stronger than our financial capital. If you are currently earning Rs 300,000 per annum, you will require at least Rs 375,000 worth of capital to generate income equivalent to your salary at 8 per cent return.
Also your salary will keep pace with inflation, while your returns from financial capital may or may not beat inflation.
The reason second phase of retirement is more difficult to plan is because, during this phase
- We are dependent on our financial capital
- There will not be any kind of addition to already created capital
- Financial needs are unique and dispersed
During retirement we require liquidity to meet contingencies. We also require regular income to meet routine expenses and we also want our capital to grow at a rate, which is equal to or preferably higher than inflation.
All the three needs of, liquidity, regular income and growth are like three legs of a tripod. All three are needed for the tripod to stand. Unfortunately all are in opposite direction to each other.
If we place our entire retirement corpus into savings bank account, we will have liquidity. However, there will not be any growth. If entire retirement corpus is in stock than there is growth but income may not be regular. On the other hand if we invest all funds into post-office monthly income scheme/senior citizen saving scheme than there is regular income but liquidity will be at a cost of interest/penalty.
For our retirement tripod to stand, we need all three legs to stand in balanced manner. If any one leg is absent or off balance than our entire retirement will become imbalanced.
Mutual funds as an investment vehicle may well be used for planning retirement finances in second phase.
Contingency/emergency funds can be parked in either liquid funds or floating rate funds. There are few mutual fund companies, which even give access to the investment through ATM facility.
For regular income, either invest in monthly income plans or choose a debt fund and opt for SWP (systematic withdrawal plan).
Lastly, for growing your retirement corpus, opt for equity funds.
Retirement is wonderful. It is doing nothing without worrying about getting caught at it. However, unplanned retirement is exactly the opposite - it is neither wonderful nor worry-free and you will get caught at it!
The author is a Certified Financial Planner. He may be reached at gmashruwala@gmail.com
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