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Many MFDs/RIAs use SWP for retirement planning. It offers flexibility, tax efficiency and market-based returns. However, many MFDs/RIAs and investors face difficulty in deciding how much to withdraw through SWP especially to fund post retirement days.
Largely, the amount of money required per month is a function of the requirement of cash flow. But it is also a function of the corpus available.
Many MFDs/RIAs calculate it on excel by keying in corpus, requirement per month, maximum amount that can be withdrawn and so on. However, there are lots of variables in this calculation like expected returns from investments and life expentancy. Also, while we can keep required cash flow requirement constant, the impact of inflation cannot be overlooked.
On top of that many investors insist on keeping the principal corpus intact so that they should not run out of money if their life expectancy increases or can pass on legacy to their legal heirs. However, these two are more of emotional or behavioral aspects.
On running out of money, if they withdraw a measured and conservative quantum from their corpus every month depending on life expectancy, there will be very little impact on the invested corpus.
Another aspect is legacy. Legacy can very well be part of the financial plan. However, there has to be a different provision for legacy planning. Ideally, investors should keep retirement corpus and legacy planning separate.
Now coming back to intergral question - how much to redeem post retirement? Let us take an illustration. Let us say a person of age 60 just retired and has Rs 1 crore as his life’s savings. Let us take his life expectancy as 80. Ideally, the corpus has to last for another 20 years.
I strongly believe that MFDs should keep investors’ life simple. Even if we take a simple approach i.e. keeping SWP constant without factoring in inflation, he can withdraw Rs.9.24 lakh per annum. (Given the client has invested in both asset classes – equity and debt and his corpus earns 7% returns). This would generate monthly cash flow of Rs.77,000 for the next 20 years.
If your client is conservative, you may recommend them withdrawing lower percentage so that the corpus lasts beyond 80 years.
Finally, MFDs/RIAs should see if children of their clients are well settled. If that’s the case, it is better to let such a client enjoy their retirement kitty.
Debtguru Joydeep Sen is a corporate trainer and author. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
