Illustration: Passive Income Generation

Suppose I have 70 lakhs with me and would like to generate an inflation-protected income for as long as possible, how and where should I invest?

The following is based on the Inflation-protected Income Simulatorand a thread at facebook group, Asan Ideas for Wealth (some inputs have been modified)

A more detailed how to generate inflation-protected income from a lump sum can be consulted by those interested.

Primary questions:

1) How much inflation can I afford to assume? The monthly income from the corpus will increase by this rate. The initial monthly expense is Rs. 25,000 per month.

2) How long can I generate such an increasing income?

Obviously, there is a tradeoff involved. The longer I want the income, the lower should it increase each year and vice-versa.

the maximum duration I can work with in the above simulator is 35 years.  For this, an inflation of about 6% can be chosen. This is quite reasonable.

Assumption: I  have adequate emergency fund and health cover.

Strategy:

  1. Create an income ladder with fixed deposits for first 5Y. A income ladder is one in which FDs (@ 8-7%) mature at the start of each for 5Y. The expenses for that year are covered with this maturity value.  Use this income ladder calculator to explore this option more. About 21% of 70 Lakhs ~ 15 Lakhs will be necessary for this.
  2. Similar income ladders will have to created for years 6-10 and for years 11-15. This means we can invest a sum for 5 years and then create the 2nd  income laddder (@ 7%). Invest a sum for 10 years and then create the 3rd income laddder (@ 7%). For less than 10Y, I would prefer not to take any excessive risks. Therefore I would like to invest an amount which can be used for income ladders 2 and 3 in debt mutual funds(@ 7%).  This is about 27.5 Lakhs.
  3. I can similarly calculate the sum required to createincome ladder 4 (years 16-20). Investment duration available =15 yearsincome ladder 5 (years 21-25). Investment duration available =20 years

    income ladder 6 (years 26-30). Investment duration available =25 years

    income ladder 7 (years 31-35). Investment duration available =30 years. All income ladders are @ 7%.

  4. Since quite a bit of time is available, we invest the amount needed to create all these ladders in equity(@ 10%).  We need about 26.2 Lakhs for this. We have about 27.5 Lakhs left. Which is not bad at all.

All the rate of returns mentioned above are post-tax. Someone with 3L annual expenses can hope to get into the nil tax bracket soon enough and with luck might stay there.

All this income ladder business is only on paper. The first income ladder is mandatory to set up. After that, the retiree can simply withdraw from the debt funds or set up income ladders for less than 5 years. There are so many possibilities. It is not practical to consider them all.

This looks pretty decent does it not? Someone with initial expenses of 3 Lakh per year can generate  an income that increases at the rate of 6% an year for a good 35 years or even more by divinding the corpus in buckets of differing risk and reward.

What can go wrong?

What if there is some kind of unexpected recurring expense? That will ruin the entire plan.

The health insurance premium is part of the annual expense. Increase in premium with age and risk is not factored in.

If the person can earn an additional income, then great. If not, they are walking on a tightrope.

New Delhi Investor Workshop on financial planning and goal-based investing

Register with the screen below or from the registration page

If you have friends or relatives in Delhi who you think could benefit from this workshop, please forward this link to them.

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete  the entire comment or remove the links before approving them.

8 thoughts on “Illustration: Passive Income Generation

  1. Anand

    Hi Pattu, thanks for re-iterating this. And since you are re-iterating, we would really appreciate if you show this through graphs/slide (like the one on retirement was simply awesome!).
    I know this is being greedy and lazy 🙂 but pictures do hit it on the nail 🙂

    Reply
  2. Anand

    Hi Pattu, thanks for re-iterating this. And since you are re-iterating, we would really appreciate if you show this through graphs/slide (like the one on retirement was simply awesome!).
    I know this is being greedy and lazy 🙂 but pictures do hit it on the nail 🙂

    Reply
  3. Deep

    A rule of thumb is to withdraw half of the nominal gdp growth from a corpus which comprises of both debt and equity .This debt equity ratio can be in the range of 40 - 60 or a balanced portfolio.India's long term sustainable nominal gdp would be in the range of 10 - 12 %(my guess).Which means a withdrawal rate of 5-6 % is a safe enough.

    Reply
  4. Deep

    A rule of thumb is to withdraw half of the nominal gdp growth from a corpus which comprises of both debt and equity .This debt equity ratio can be in the range of 40 - 60 or a balanced portfolio.India's long term sustainable nominal gdp would be in the range of 10 - 12 %(my guess).Which means a withdrawal rate of 5-6 % is a safe enough.

    Reply

Do let us know what you think about the article