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Effective ways to withdraw retirement corpus that will help save more

Life post-retirement can be tough if you have not saved enough. Once you are retired and have no access to regular income, deciding when and how much money to withdraw matters more than how much you have been able to save

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Shailesh Khanduri
13 Feb 2023
Effective ways to withdraw retirement corpus that will help save more

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New Delhi: The amount of withdrawal is one of the most important decisions to make in retirement. The amount you withdraw can have a variety of consequences. Depending on how you treat your finances, you could either end up with a decent corpus that you may leave behind as a legacy to your descendants, or you could completely deplete the corpus and struggle to pay for your essential expenses when you are nearing your end. Either way, money treats you as you treat it, which is why you must be careful and assiduous with your money.

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To ensure that you never run out of money in retirement, you should have a retirement withdrawal strategy in place. Furthermore, you must be aware of strategies that will assist you in designing your retirement life based on how much money you have with you every year. Adopting some simple yet effective strategies will help you navigate the not-so-easy phase of a retired life.

How to decide your withdrawals?

Why not adopt a straightforward strategy in which you can withdraw a fixed percentage of your money each year? For example, if you have accumulated a Rs 1 crore retirement corpus and wish to withdraw six per cent each year, your withdrawal in the first year would be 6 lakhs. Only if your investment corpus grows at seven per cent per year, your corpus must be at least Rs 100.58 lakhs at the end of the first year. In the second year, the withdrawal amount would be Rs 6.03 lakhs, and so on.

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To ensure that your corpus sustains you for the remaining years of your life post-retirement, remember:

  • A lot depends on when you choose to retire. Deciding on withdrawals based on how early or how late you retire is a time-tested strategy. If you retire early, your withdrawal rate should be lower. However, if you retire much later than when your peers retire, you may opt for a higher withdrawal rate.
  • Ensure that the retirement corpus grows faster than the withdrawal rate in the early years. As a result, the retirement corpus will initially increase. Considering how inflation will inflate expenses in the long run, the retirement corpus will begin to shrink.
  • Though your proclivity to consume decreases as you grow older, you cannot ignore the possibility of your healthcare expenses going up with each passing day.

Have a plan in place

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The idea behind withdrawing your money in small instalments is to never touch the invested corpus and instead live the rest of retirement on the income generated by the retirement corpus. This simply means that you must not touch the corpus but rather strive to live on the interest amount. The corpus could provide you with rental income, dividends, or interest income. A unique benefit of this strategy is that you will never run out of money. However, such strategies necessitate larger corpora, which most people do not have. Furthermore, if the investments are in asset classes such as equity or real estate, the annual income will vary based on market performance and occupancy rate.

Adopting the bucketing strategy

Creating three distinct buckets for your investment strategy will help you save much of your retirement corpus with every bucket strategy serving you with its inherent benefits.

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Short-term bucket strategy

This bucket basically guarantees that expenses will be covered for the next five to ten years. This money can be put into tax-advantaged fixed-income investments.

Medium-term bucket strategy

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The second leg of your retirement journey will be covered by this basket. The plan is to gradually shift investments from this bucket to the liquidity bucket once the liquidity bucket is nearly empty. Ideally, this bucket should hold five to ten years' worth of expenses. The investment decisions in this bucket are solely determined by the amount of money placed in the liquidity bucket.

Creating wealth strategy

You must plan your investments with a long-term plan in mind. This is the long-term investment bucket, which will be invested with the long-term goal of outperforming inflation. The remaining funds would be invested here after being invested in the first two buckets. Essentially, equity investments would be made in order to generate higher long-term returns.

There is no such thing as a set strategy. It is not possible to set it and forget it. On an annual basis, you must continuously monitor your investments. The sequence of returns, the retiree's health, and economic inflation are three factors that have the potential to derail retirement.

Furthermore, it is prudent for anyone in their early retirement years to focus on generating active income. If you can cover some of your annual retirement expenses with active income during your early retirement years, you will not only stay healthy and active, but you will also help to extend the life of your retirement corpus.

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