Build a comfortable nest egg

LIKE in the movies where you often have a turning point during intermission which neatly divides the movie into a first half and a second half, life too has two distinct phases. Unfortunately there is no intermission between the two to help us take a break and gear up for life after interval. The two phases of life can be divided into:

1. Wealth earning
2. Wealth reaping

We all know that the earning phase is about - deadlines, long working hours, bonuses, angry wives and fat bank balances. But it's the latter phase that requires acute attention.

Most people in the second phase seem to have one question on their minds: How can I get a steady rate of income year after year from a safe instrument? This is a pretty shallow way of looking at it, and can get you only shallow answers.

Let me illustrate:
An annuity product (one where you invest a lumpsum and get monthly income) gives you a steady income for as long as you live, and your family gets a big packet of money should you pass away. Suppose you need Rs 25,000 per month to survive comfortably, this means you would have to invest a lumpsum of around Rs 50 lakh (Rs 5 million) (at a rate of return of 6%).

So where's the problem?
a. Inflation: After 10 years, Rs 25,000 will be worth only about Rs 15,000, allowing for 5% inflation. This means an increased income stream, depending on your lifestyle and needs.

b. Emergencies: You may urgently need funds, or help your children or friend, or just take quick advantage of an opportunity. But your money is locked - if you withdraw, your cash inflows will stop, and if you re-deploy afterwards, you may not get the earlier rate of return.

c. Base Funds: What if you need Rs 25,000 to survive, but don't have a Rs 50 lakh (Rs 5 million) corpus to begin with?

Moral of the story: not a single retirement/ pension product available today is remotely close to meeting your requirements!

The way ahead:
1. Firstly, you should know for how many years your funds will survive. You don't want to be in a situation where at 70 or 80+, you have outlived your resources, and have to worry about how you can manage.
2. Have your advisor create an increasing income stream for you - the increase being at least in line with inflation rate. Now find out the following:
a. Is your product flexible enough to let you to take advantage of opportunities and give you liquidity at minimal transaction costs?
b. What are the effects of taxation on your chosen strategy?
c. In case of a medical emergency, who will manage your funds and how?
d. In case of your death, how can you ensure that funds are distributed among your spouse/ children, as you like it?

Now, let's get back to the earlier example. To have a Rs 25,000 income every month, with an annual increment of 5% to match inflation, an amount of Rs 36 lakh (Rs 3.6 million) can also suffice. But that means you are just about meeting your ends.

These numbers in the table should give you an idea of the kind of cash inflows you will need when you approach 60:

Age	Monthly income support required (at 5% inflation)	Age	Monthly income support required (at 5% inflation)
60	25,000	66	33,502
61	26,250	67	35,178
62	27,563	68	36,936
63	28,941	69	38,783
64	30,388	70	40,722
65	31,907	71	42,758

Now clearly these cash flows are dynamic and take into account increasing expenses also. And that is essentially how your expenses are likely to grow too. So don't forget these numbers when you set out to plan your retirement.

And surely, this new way of looking at your retirement planning can ensure that the second half of your life after intermission will only lead to a happy ending!