Last Updated on February 12, 2022 at 6:17 pm
Let us think about it for a moment: What is the ideal retirement plan? One that guarantees income for our lifetime, one that helps tackle inflation and unexpected expenses after retirement. All this with as low a corpus as possible! Yes, that does sound too good to be true. However, we can get close to this situation if there is enough time on our hands. Let us see how to set up an ideal retirement plan with an idea known as income flooring (video example included).
While we are young, many of us tend to look down upon the idea of a pension or an annuity. However, as we age, the idea of guaranteed income each month becomes more and more enticing. However, the problem with a pension is that it fails to combat inflation which is anywhere between 6-8% and unexpected huge/recurring expenses. Also to get a pension a large portion of the corpus should be locked up for life. So the ideal retirement plan should combine the two ideas of constant income and liquid wealth.
This automatically means we cannot aim for minimising the retirement corpus, but that is fine as long as we have at least ten years to retirement. Most people who are reading this should have considerably more time and should not get scared about what they need to accumulate for retirement. See why: Do not be scared by what you need to accumulate for retirement!
The conventional retirement calculation assumes a corpus X. After retirement, we invest this X in different buckets – low risk for immediate income, medium risk and high risk for future income. You can use the freefincal robo advisory template for the full calculation.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Now from this X, we keep withdrawing monthly expenses and assume that each year the monthly expenses increase at some rate of inflation (6-8% typically). If we expect to live for say 30 years post-retirement, the X will reduce to zero at that age. So the retirement planning calculation has two parts: What is X? How much should I invest to get X upon retirement? The robo template will also tell you the asset allocation (how much in equity and how much in fixed income) for each year up to retirement.
Let us redo this calculation with a “minimum guarantee”. Assume we are 55 years of age and the current annual expense is Rs. six lakh. Those younger will have to inflate their current expenses to what it would be at age 55 at say 6% inflation. This is important, but you can do this later.
Now, this annual expense of six lakh will increase each year at say 6%. My retirement corpus is X and I now divide this X into two parts. X = X1 + X2. I will invest this X1 in secure investments (eg. PO schemes) and get a post-tax return of 6% and annual interest = the annual expense in the first year of retirement.
What is income flooring?
We guarantee throughout our retirement a secure income equal to the annual expenses in the first year of retirement. This is known as income flooring. For the current example, X1 is one crore. Now since annual expenses will keep increasing due to inflation, I need some extra corpus to handle this. This extra corpus is X2.
Finding X1 is trivial (6L/6%) and finding X2 is easy enough. The only problem is, X1 + X2 will be a bit more than X from the conventional calculation, but it is far more secure. Also, my equity exposure can be lower (see video below)
Income flooring example
Pros and cons of the “ideal retirement plan”
Even an idean plan has some disadvantages. In this case, it is a bit higher corpus! So my suggestion would be to use a standard retirement calculator and get started. This is a simple approach:
Once you start investing, you can consider graduating to the robo advisory template for better control of parameters and understanding. Then after you are confident that you will be able to achieve that corpus of X (crores!) you can try this income flooring approach, check how much you need to invest more and strive towards that. The income flooring approach is likely to be too late for those who are 50-plus.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)