Transcript of Podcast:
Hi I am Arjun Parthasarathy speaking and this podcast is on “Solving the Monthly Income Problem for the Retired and Non Salaried”
When you are working with a steady job, you receive monthly salary that takes care of expenses. However once you stop working, the regular monthly income stops and meeting living expenses then requires a lot of planning. What are the options available to you to generate monthly income once you stop working and what would be the best option?
The salaried receive pension from their employers, which by nature is not enough to meet living expenses, as inflation would have depleted the value of the pension. Typically pension funds in India and across the world struggle to meet the returns required to fund pension payouts and hence that crimps the ability of the funds to pay out more as pensions to take care of inflation.
The salaried also get a lump sum from investments in the public provident fund at the time of quitting the workforce. Again the public provident fund investments are largely in fixed income securities as the amount is guaranteed and actually depletes in value due to inflation.
Investments in annuities, insurance products and other pension products again have the same problem of not being able to beat inflation due to predominantly investing in fixed income securities.
Rental income is one good way to earning monthly income but not many can afford to buy property that is expensive and if rental yields are low, then it is not good economics. Also property can be highly illiquid, require maintenance, can lose value sharply for various reasons such as slowdown in particular sectors of the economy such as IT sector or construction of road that causes high pollution due to traffic etc.
If the savings are too low to generate a good monthly income, it becomes a struggle to meet day to day expenses for the retired and non salaried class.
A good way of generating monthly income post retirement is to build a very strong retirement corpus that can be drawn down systematically. In this way, a large part of capital can still be invested to generate returns and that can take care of issues of longevity.
Now the question is how to build a large corpus to sustain you once you stop working. Given that all your pension savings are invested in fixed income assets, you would require to invest in financial assets that grow. Equities should play a large part in your saving for retirement or for giving up a salaried job.
Equities come in many forms, you can buy stocks, invest in mutual funds or other funds, active or passive. Equities come with a risk as well as markets can go up or down depending on various factors. Hence once you have selected a good equity route, which does not carry high cost, you need to protect your returns when markets get overheated. In this way your savings grow fast and stays high.
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