Last Updated on October 8, 2023 at 1:34 pm
A catch-22 situation is one from which there are no easy solutions. Any move we make will be associated with significant disadvantages and risk. Such situations are often found in retirement planning. Whether you are a middle-aged employee heading towards retirement or a young earner trying to manage their parents’ retirement fund, understanding when a catch-22 can arise is important.
First some news: my new book with Subra(money.com), You can be rich with goal-based investing is now available at Flipkart for Rs. 359/- only! Pre-order now!
Consider a couple that requires Rs. 2.5 Lakh (2,50,000) at the start of their retired life. We will assume that their expenses will increase at only 6%. If we assume a 100% conservative interest rate of 7% (post-tax) and assume that they will both live for next 20 year (only!), using the Four Simple Retirement Planning Tools one can calculate that the corpus required is: Rs. 45.8 Lakhs.
If they this much or more, there is nothing to discuss further. A very common situation is that many have less, much less.
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! 🔥
What if they had only 50% of required corpus: ~ 23 Lakhs?
Then, assuming inflation is still 6% and interest rate is still 7%, if they keep withdrawing money from the corpus each year, it will only last less than 10 years:
If the corpus is less and the investments do not yield much, there is a danger of running out of money to live on.
If we insist, the money should last for 20 years with 6% inflation, the corpus should be invested such that the return is 17%! Now that might seem ridiculous to anyone with comonsense but some suggest 100% equity after retirement and also expect that much (or more!) returns!
Obviously expecting 17% returns from the entire corpus is far from realistic. This is possible only if one invests in volatile instruments. This means taking on more risk.
If a retiree takes on risk in the hope of achieving more returns, they might end up reducing the corpus fast!
It is extremly important to understand that there is not such thing as a notional loss for a retiree. Any significant loss in the market could take years to overcome and in the meanwhile the retiree will be drawing more and more from a depleted corpus.
No risk taken with a low corpus implies it will not last long.
High risk taken with a low corpus with the hope of making it last longer could deplete it faster than the above option!
I hope you can see the catch-22 situation forming. How much risk is just right is practically impossible to answer. Especially because most of the retirees today will not have experience with volatile instruments like mutual funds. They might get sacred and exit at the wrong time making further damage.
If a retiree has 10% equity exposure, it may not be enough to make a difference. Increase this and it will rapidly increase the risk or the maximum loss one will have to bear. Read more: Asset allocation for long-term goals.
I have discussed a case (commonly seen) where the corpus is only 50% of what it should be. In such cases, the only solution is to purchase an annuity and lock-into a fixed interest rate for the retiree. This is far from ideal, but would at least guarantee some income for life. It however cannot account for large unforseen and recurring expenses that a retiree couple may incur.
If the available corpus is 75-80% of what it should be then “some” risk can be comfortably taken. How much is that “some” is again difficult to quantify.
In an earlier posts, I had come up with a simple set of rules reg. When should senior citizens purchase an annuity? Do give this a try and let me know what you think.
Also everything you wanted to know about how Annuity Plans Work can be found here.
🔥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)