# Generating an inflation-protected income with a lump sum

Given a lump sum, how do we invest it in order to create a reliable income stream that is risk-free and has the ability to keep pace with inflation?

This is the most crucial question that concerns every person who is retired, nearing retirement, or planning for someone else’s retirement (a client or a parent perhaps).  Well, at least it ought to be!

The answer concerns everyone since we all have to answer this question at some point in our life.

This post is an offshoot of a discussion with Vignesh Bhaskar in Asan Ideas for Wealth, FB group.  Not much information is available on inflation proof post-retirement investment strategies  for the Indian scenario.  Let us try and discuss this here from time to time.

Most questions have more than one solution.  This is no different.  There are many ways of creating a reliable inflation-protected income stream.  In this post, I will discuss only one such way.

The best way to do this is via an illustration.

Let us say that I am a retiree, aged 60, with Rs. 30,000 monthly expenses (involving only the retiree and dependents) or Rs. 3,60,000 per year. Perhaps a touch on the lower side.

I make the following assumptions

• Inflation throughout the retiree lifetime: 8%
• Inflation-protected income required for: 25 years That is up to 85 years. Perhaps 30 years would have been better, but let us work with 25.
• Mediclaim: Available. Premium expenses included in the annual expenses.
• Emergency fund: Available.  A sum equal to 1 year’s expenses.  This is not part of the retirement corpus.

Now we will need to  calculate the corpus required

I have assumed that I pay a flat 10% tax on all investments throughout my lifetime. This is indeed an oversimplification. Unfortunately, we will need to use this, as it will be confusing to consider other possibilities.

A post-tax return of 8% may seem a bit unrealistic. However, if a retiree in the 10% tax slab opts for fixed deposits offering 9% for senior citizens (current rates), the post-tax return is about 8%.

Using the annuity calculator, we determine the corpus required

Inputs

Payout required in the first year of retirement: Rs. 3, 60,000

Inflation: 8%

Post-tax return: 8%

Duration: 25 years

Output

Corpus required: Rs. 90,00000 or Rs. 90 Lakhs

If I have an amount close to this or higher than this, I can relax.

What if I have a corpus less than 90 Lakhs? What should I do?

In order to answer this and the question posed in the opening sentence, let us first try to understand why I need Rs. 90 Lakhs given the other inputs.

If I divide this 90 Lakhs into 25 parts, each part is equal to 3.6 Lakhs. This is just the amount I need for meeting my expenses in the first year of retirement.

•  I keep aside one part for meeting the first years expenses.
• I then open 24 fixed deposits. Each maturing one year after the other. That is the first FD will mature after one year, the second FD after two years … the last FD after 24 years.
• When the 1st FD (investment = 3.6 L) matures, I will get 3.88L enough to meet expenses in the 2nd year of retirement (here expenses have been inflated by 8%)
• When the 2nd  FD (investment = 3.6 L) matures, I will get 4.19L enough to meet expenses in the 3rd year of retirement (here expenses have been inflated by 8%)
• …..
• …..
• When the 24th FD (investment = 3.6 L) matures, I will get 22.8 L enough to meet expenses in the 25th year of retirement (here expenses have been inflated by 8%)

Here is an illustration which explains why I need 90L

Suppose I do not have 90 L. Can I work with a lower corpus and yet mange to generate inflation protected income?

To a certain extent, it is possible. Of course, as must be obvious, one will need to generate a higher rate of return.  This implies taking on some risk … with a part of the corpus.

In order to understand this, we will need to discuss about the so-called bucket strategy

The best way to do that is to use the above numbers.

Instead of opening 24 FDs, I can achieve the same result in a different.

• I keep away 3.6L for the 1st year.
• I open 4 FD for 3.6L maturing one year after another as mentioned above.
• This will give me inflation-protected income for the first 5 years in retirement.
• This is called income laddering (also one form of FD laddering)

I invest 18L in an FD that matures in 5 years. Let us call this bucket I

I invest 18L in an FD that matures in 10 years. Let us call this bucket II

I invest 18L in an FD that matures in 15 years. Let us call this bucket III

I invest 18L in an FD that matures in 20 years. Let us call this bucket IV

• Bucket I will mature to 26.44 L.  I then split this up into 5 parts, keep one for managing expenses in the 6th year of retirement and use the remaining parts for managing expenses in years 7 to 10 by income laddering.
• Similarly, bucket II will mature to 38.86 L.  I then split this up into 5 parts, keep one for managing expenses in the 11th year of retirement and use the remaining parts for managing expenses in years 12 to 15 by income laddering.
•  and so on.

Here is an illustration

In essence, instead of creating an income ladder for 25 years, as mentioned infirst scenario, we create an income ladder for the first 5 years, let the rest of the corpus compound in four buckets, and create new income ladder every five years.

I have assumed that all the buckets compound with the rate of return (8%). So there is no difference between the first and second scenarios. In effect the total corpus needed is the same.

What if, some of the buckets compounded with a higher rate of return?

Can I then not reduce the total corpus required?

Yes, this is indeed possible. Here is a list of different return scenarios. Thanks to Captain Ashok Kumar Anand for pointing out an error in this table. It has now been corrected.

Notice that the returns associated with different buckets have been varied. The first scenario, of course corresponds to the one detailed above.

Notice that as you increase the return in different buckets, preferably the ones which you will need 10, 15 and 20 years later, the corpus required comes down quite sharply from 90 L to 67.5 L

How can I go about achieving this?

Here are some examples

Low risk

Bucket 1 (5Y duration): FDs

Bucket 2 (10Y): Debt ‘income’ funds

Bucket 3 (15Y):  Balanced funds (25% equity)

Bucket 4 (20Y): Balanced funds (65% equity)

Medium risk

Bucket 1 (5Y duration): FDs

Bucket 2 (10Y): FDs

Bucket 3 (15Y): Balanced funds (65% equity)

Bucket 4 (20Y): Diversified equity

High risk

Bucket 1 (5Y duration): FDs

Bucket 2 (10Y): Debt ‘income’ funds

Bucket 3 (15Y): Diversified equity

Bucket 4 (20Y): Diversified equity

How to decide what to do?

This is a tough question!

• If I have 90L+ I can afford to choose the no-risk option (all buckets in FDs)
• If I have ~ 80L I will need to take some risk and invest buckets 3 and 4 in high return, tax-efficient instruments
• If I have ~ 70-75L I will need to take much more risk and invest buckets 2, 3 and 4 in high return, tax-efficient instruments. Do I have the stomach for this?  If I don’t, I will have to choose a constant annuity from an insurer and my income will have little or no inflation-protection
• If have less than 70L, it is too risky to use buckets. I will have to resign myself to the fate of receiving constant annuity
• Note: This is a ‘all-in’ strategy. That is once you choose the bucket approach, seeking annuity later in life may not (or may!) give you a decent pension. So you will to consider your health into the equation (thanks to Subra for pointing this out). Are you fit enough to manage your own corpus?

What would you do?

Are you doing enough to ensure that you don’t face the prospects of constant annuity?

I apologise for the heavy content of this post. If you have made it this far, thank you! If you need clarifications on any aspect of the post, please feel free to ask.

I have an associated calculator. If you are interested in it, let me know, and I will post the download link.

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## 94 thoughts on “Generating an inflation-protected income with a lump sum”

1. AyushP306 says:

Awesome post sir! I am halfway and still reading.

1. pattu says:

Thanks Ayush. Let me know if you have any suggestions from your side.

2. AyushP306 says:

Awesome post sir! I am halfway and still reading.

1. pattu says:

Thanks Ayush. Let me know if you have any suggestions from your side.

3. Ashal Jauhari says:

Dear Pattu, Thanks for a detailed post on the demands made by group members.

Thanks

Ashal

1. pattu says:

Thanks Ashal.

4. Ashal Jauhari says:

Dear Pattu, Thanks for a detailed post on the demands made by group members.

Thanks

Ashal

1. pattu says:

Thanks Ashal.

5. Syamantak says:

Another fantastic post Pattu. You seem to be working hard on point 5 of your new year resolutions! I’m waiting for the day to read you on a book 🙂

I am certainly not nearing my retirement (unless forced. Otherwise I will complete 32 in another month) but would like to see how the figures look like post retirement. Can you please forward me the link either in FB or in gmail.

6. Syamantak says:

Another fantastic post Pattu. You seem to be working hard on point 5 of your new year resolutions! I’m waiting for the day to read you on a book 🙂

I am certainly not nearing my retirement (unless forced. Otherwise I will complete 32 in another month) but would like to see how the figures look like post retirement. Can you please forward me the link either in FB or in gmail.

1. pattu says:

Thanks Syamantak. I am surprised by the reception to this post! I thought there will be few takers for this. So I will post this calculator next week. It is ready but looks crude. I need to polish the interface. Thank you.

7. Vijay says:

Dear Pattu, Thanks for providing an excellent tool.

1. pattu says:

Thanks Vijay.

8. Vijay says:

Dear Pattu, Thanks for providing an excellent tool.

1. pattu says:

Thanks Vijay.

9. Ramamurthy says:

As usual your post is great.Many thanks for educating us free of cost.
However,you seem to be totally scared to invest in direct investment in equity shares.The last 20 Years data ,as per experts(I am not one),say that equity investment has produced the most attractive returns among all investment oppurtunities.You really do not need much expertise in choosing the companies to invest in as per my experience.
Any particular reason for this?

1. pattu says:

Thank you. Yes I am sacred of equities. I don’t understand business. Only last year I got a demat acc to play around a bit with stocks. I haven’t really started yet.

You are right. If someone is in direct equity, then they have more flexibility wrt the corpus.

The way I see it, mutual funds are more than enough for getting real returns.

10. Ramamurthy says:

As usual your post is great.Many thanks for educating us free of cost.
However,you seem to be totally scared to invest in direct investment in equity shares.The last 20 Years data ,as per experts(I am not one),say that equity investment has produced the most attractive returns among all investment oppurtunities.You really do not need much expertise in choosing the companies to invest in as per my experience.
Any particular reason for this?

1. pattu says:

Thank you. Yes I am sacred of equities. I don’t understand business. Only last year I got a demat acc to play around a bit with stocks. I haven’t really started yet.

You are right. If someone is in direct equity, then they have more flexibility wrt the corpus.

The way I see it, mutual funds are more than enough for getting real returns.

11. Sandeep says:

Awesome post Sir, However what if the 2 assumptions removed i.e. of Mediclaim and emergency fund, Scenario might look scary. In real life, my maternal uncle facing same problem, Retired with no mediclaim and emergency fund. Need guidance

1. pattu says:

Thanks Sandeep. Yes it would be. However, if we have both before retirement, it will not be much of a problem.

You uncle will have to allocate some money towards the emergency fund and get a mediclaim immediately. There is no other option. I will need more details if you need further help.

12. Sandeep says:

Awesome post Sir, However what if the 2 assumptions removed i.e. of Mediclaim and emergency fund, Scenario might look scary. In real life, my maternal uncle facing same problem, Retired with no mediclaim and emergency fund. Need guidance

1. pattu says:

Thanks Sandeep. Yes it would be. However, if we have both before retirement, it will not be much of a problem.

You uncle will have to allocate some money towards the emergency fund and get a mediclaim immediately. There is no other option. I will need more details if you need further help.

13. A retired friend of mine is asking what to do as banks do not accept FDs over five years. Can u help?

1. pattu says:

Zarir, As PlanRupee points out FD can be accepted for up to 10Y. Even if they don’t A 5Y fd if not redeemed will typically be renewed for 5Y more! So not much of an issue

14. A retired friend of mine is asking what to do as banks do not accept FDs over five years. Can u help?

1. pattu says:

Zarir, As PlanRupee points out FD can be accepted for up to 10Y. Even if they don’t A 5Y fd if not redeemed will typically be renewed for 5Y more! So not much of an issue

1. @Pattu,
although you are right about renewal after 5 years, Zarir or his friend probably want to ‘block’ money at today’s (prevailing) high interest rates. In short, investor may want to avoid reinvestment risk by investing for 10 years at one go.

1. pattu says:

Yes I understand. Thanks.

15. @Zarir,

1] Banks certainly accept FDs upto 10 years.
I have recently prepared a simple table for a Sr Citizen … with ‘tenure & RoI’ of PSU banks that offer upto 10 year FD. I have included Top Pvt banks too in the same table.
2] Also, there is a AAA rated ‘PSU’ that accepts deposits (AAA rated PSU Corporate FD).
Do let me know in case you need additional information.

16. @Zarir,

1] Banks certainly accept FDs upto 10 years.
I have recently prepared a simple table for a Sr Citizen … with ‘tenure & RoI’ of PSU banks that offer upto 10 year FD. I have included Top Pvt banks too in the same table.
2] Also, there is a AAA rated ‘PSU’ that accepts deposits (AAA rated PSU Corporate FD).
Do let me know in case you need additional information.

17. Selva says:

Very well explained Pattu. Thanks. Index Funds/ETF can be used for Bucket 3/4, for the conservative/moderate investor. 8% may be aggressive post tax returns even for a retiree, 7.2% (9% * .8) or 6.4% (8% * .8)..may be more like it, also factors in lower FD rates in future. IIB’s can be a good alternative, but there is no regular payout option as of now, unlike FDs/Post Office.
Do share the excel calc..

1. pattu says:

Thanks Selva. The advantage with the bucket method is, the options are literally endless! i will post the excel next week. It is ready but requires a little cleaning up to make it presentable.

18. Ramamurthy says:

You have not talked about having a own house to reside at the time you retire and retiring with NIL liabilities?If you do not satisfy both these conditions your may need much more than Rs 30000 pm.Do you agree?

1. pattu says:

You are right. People with liabilities should not retire!! Or, they should have cleared all liabilities at least a year or two earlier. My idea was to introduce a concept. We will have to tailor it as per the individuals need.

19. Ramamurthy says:

Plan Rupee,
Very interested in knowing the table which you mention and also other details.

20. Ramamurthy says:

Bank FD,s need not be the only investment source. How about investing in Tamilnadu Power Finance and Infrastructure Corporation FDs.It is a TN Govt undertaking and therefore reasonably very safe. they offer 10.65% montlhy interest to senior citizens.(10% to others)Any comments?.

1. pattu says:

Certainly a good idea, Sir. A couple of years it was as high as 12%.

21. Ramesh says:

A very good post with the slow expansion of the basic idea to include FD, debt and equity funds.

I would suggest only 1 small thing – a multiple value would have made things even easier (it is very easy to understand even now). Eg. the 90L value is just 25x (of 3.6L). So if we have a net real return of 0% (8% inflation and 8% post-tax return), then a 25x corpus would run for 25 years. Similarly, with increasing the rate of return in the later buckets, the corpus required has dropped to 18x in the final group. For understanding this is excellent.

For another blog post (and mixing up with some of your older ones using Monte Carlo and others which have used past data), you can go with the idea of actual performance of those lesser corpuses for a period of 25 years.

A third idea would be in case of a rapid upmove in the equity categories’ buckets, a downshift to a more conservative bucket strategy is a good idea (oops, that was a trade secret of the financial planners!!).

1. pattu says:

Thanks Ramesh. I am amazed by the response to this article! I thought no one will read it! Just shows how much this kind of information is in demand.

As regards the real return idea, I agree. I had written part of this before our discussion on FB. So I just ran with it.

As for volatility in the bucket method, I have already included this in the simulator. Perhaps I will do another post about it.

As for the trade secret(!), you are right that will be even more effective.

In fact a good part of the equity in the accumulation phase can be left as it. That is, there is no need to have a lump sum when we retire. All we need to ensure is low risk regular income for about 10Y while the rest compounds in different buckets.

Thanks.

22. @ Ramamurthy
No option to paste table in the comments box here.

Pls drop me a test mail on the below address…
PlanRupee_at_gmail_dot_com

1. pattu says:

Why not simply post the link here?

23. Sure Pattu Sir, here goes the link …

http://planrupee.com/fixed-deposit-rates-senior-citizen-banks-psu-large-private-nbfcs-psu-aaa-aa-rated/

–> I had not done the blog-post for it. As I mentioned it was in a simple table format. Reason of not doing the post was that since there is no great value addition from my side, why bother posting it?
But thanks to you, I did.
Hope you go through the post (and other posts too).

@ Ramamurthy; @ Zarir;
Hope the link above is useful to you too.

1. pattu says:

Thank you for taking the time and effort to write a post about it. Thank you for mentioning me. I appreciate it. My two cents: don’t use ‘uncategorised’ as a category. I had a lot of trouble with it. Use the default category as the one you will most often write about. So even if you forget to choose the category it will not matter much.

1. Thanks for the link. I have forwarded the same to my friend.

2. sundararajan says:

As every document / calculator , very useful information. The above link is not working. Can you fix it? Thanks,

24. bharat shah says:

‘.The last 20 Years data ,as per experts(I am not one),say that equity investment has produced the most attractive returns among all investment oppurtunities.’ i feel , it would not be improper to share my observation in this regard:.i like to share my observation and learning in this regard.
i
am totally a diversified equity mutual fund investor as far as equity
portion of my portfolio since last 4 and 1/2 yrs . since last one year i
came across two last wealth creation reports of a well known brokerages
, and i found a hundred companies delivered handsome price cagr return
compared to sensex over 5 yrs. period in both reports. as such, in last
report, the 100 companies gave average price return over cagr 17% v/s
cagr 4% by sensex. i thought , it could more beneficial to be in direct
equity rather than through diversified mf route , as good no. of
companies are available for such return in indian market. incidentally i
come across the performance data of pms plan from the same brokerage. i
found that though its performance over 10 yrs. is better than sensex by
good margin after expenses, some 15 diversified equity mfs from large
cap category gave better performance than the pms, and some 40-50
diversified equity mfs performed better than that pms in last 5yrs, 4
yrs and 3 yrs..so i learnt that back testing and finding is one thing ,
and achieving excellent performance (read to be at the top!) is all to
gather different. be with the good diversified mfs over period of 10 yrs
rather than direct equity investment .

25. Ramamurthy says:

What is this PMS plan you are talking about please?Whether direct Investment in shares is better than investing through Mutual Funds is debatable.
To take a simple example many diversified Mutual Funds have investment in Infosys in their portfolios .Investing in Infosys directly is far more beneficial than investing in Mutual Funds which have Infosys in their portfolio.

1. bharat shah says:

@ Ramamurthy
i concur with you that Whether direct Investment in shares is better than investing through Mutual Funds is debatable. even passive (index based fund) investment v/s active (diversified mf ) investment is debatable. i just mention my observation. i do not disagree with your choosing infosys or any other equity share based upon one’s own line of thinking. i am more about the performance of one’s equity related portfolio as a whole rather than one or two co. ‘s equity shares and for point of a common investor like me. i compared the performance of the pms of the same brokerage , who publishes the wealth creation study of the indian companies over 5 yrs since last 18 yrs., with that of large equity diversified mfs to understand how easy or difficult to get better performance by investing in direct equity. my point is : when pms by the wealth creation study carrying brokerage is not bettering the mfs at large, how can common investor do it? i can’t name the pms for obvious reasons and that pms has done better than index funds , but large no of large diversified mfs did better than the pms. you can easily find out the wealth creation study carrying company name and its pms easily by googling.

26. Sandeep says:

Thank you Sir. Please let me know the what more details will be required. It would be great help.

1. pattu says:

Sandeep, You can write to me at pattu [at] iitm.ac.in to discuss this further. In general, mediclaim is a must for every retiree. Reg. the emergency fund, and use this bucket method, there are many personal factors like health of the retiree, other circumstances, actual corpus, et. etc. So it would require some planning. I can give you some pointers to start with.

1. Sandeep says:

Sir, Mailed you the details. Pls check and reply as per your schedule. Thanks

1. pattu says:

27. Selva says:

Absolutely.. But I like the term ‘Bucket Method’. Look forward to the excel..

1. pattu says:

Thanks Selva. Will post it next week.

28. Ramamurthy says:

I am not asking you to name the pms,please.I just want to know definition or expansion of pms.

29. bharat shah says:

it is abbreviation of Portfolio Management Service , which is being offered by leading brokerages for Rs. 5 lacs or more equity shares’ portfolio made up of 10-15-20 companies’ equity shares , managed by the brokerage without any interference of the investor, but on account and in account of the investor. it is generally % age based service , and expected to give better return than the index and diversified mutual funds at large. as far i know , there are reports of very bad returns on pms managed by many well known brokerages due to conflicts of interest , and inapt management. if i am not wrong ,Subra advised not to go for pms for portfolio of less than Rs. 1 crore or so. theoretically for a common investor, it should be better with pms than direct equity investment by shelf, as the pms should have expert knowledge , i think. but no. of mutual funds do better , why not go with selected mfs.

30. Ramamurthy says:

Thank You, Bharat ,for the detailed clarification

31. Dilip says:

Thank you sir.this is awesome. When I share a photo on FB, lots of likes and comments I receive but when I am sharing eithey your post or subra post, it seems no one reads .but again today I shared this post. Hopefully at least one person reads it.most of the people believe RE only the life jacket that protects them from all emergencies in life.thank you once again.

1. pattu says:

Thank you very much dear Dilip. I appreciate your support.

32. Ramamurthy says:

Problem is,most Indians including educated Indians, are convinced that only Gold,Real Estate,Govt Pension,PF,Gratuity are the only sources of retirement planning.If you tell them there are other sources they brush it off saying it is all gamble.Sad state of affairs.

1. pattu says:

Well said. Cannot agree more.

33. v ramachandra shenoi says:

Dear pattu
Referring to your bucket 1 strategy, I have to say something.
I am sending a strategy platform, which will optimise the yield of bucket 1
)Involving the FDI FD2,etc…) Please examine. Sent to you by e mail.
I contend that what I have designed is with a positive bias, and in no way contradicting

1. pattu says:

Thank you. Will take a look.

34. Partha says:

Very good article. However, I would like to know about such cases where the person will get pension after retirement and have medical cover for himself and his spouse.

35. Anurag says:

Nice post.. Thanks a ton for effort… Just one small thing which was bothering me.. Any one having 90L in FDs with 9% interest will earn 8.1L as interest per annum and will not remain in 10% tax bracket.

36. Puneet says:

I would really like to thank you for this post Pattu sir.
This actually has helped me in making my parents save required amount very easily 🙂

37. Surya says:

Where we can open 20 years FD?Does any bank offer 20 year FD?Please suggest on that.

38. timmy says:

dear mr.pattu,
reading your posts for the 2/3 months. outstanding presentation in each. my status..retired, no income.. current expenses..1 lac pm. children.. 2 in first year of employment(finished education, unmarried). total..current assets in fd/kvp/ppf/cg bonds…144 lacs + agricultural/commercial land …all disposable at times of need and valued much more as per your calculators. My question..is land not a bucket? when should it be coverted to a financial asset?
m

39. timmy says:

#1. valued at 2/3 times more than amount than amount needed for 58 yrs to 90 yrs age as per your calculators.
#2. Is debt/equity investment not riskier and than real estate?

40. Amit Pundir says:

If you have 90 L then why donot FD it for 10 years and you will be inflation protected for 10 years since you will get 7.2 L per year interest. So a saving of Rs. 3.2 Lakh in first year which you can further FD for 11 th year deficit. Same way we can do every year. At the end 90 Lakh will be saved and in hand also.

41. Pramod says:

First of all THANK YOU for this article and most important explaining it in a simple way with illustrations. When it comes to anything related to Finance i am a layman and you took such people into consideration while writing this article. THANK YOU.

1. freefincal says: