A reader says, “I’ve modelled my retirement plan utilizing the freefincal robo advisor. The choice to safe part of retirement bills with revenue flooring is especially interesting after studying reader journeys like How I used RBI Retail Direct to purchase authorities bonds and create an revenue supply and The system I exploit to attract revenue and spend after retirement securely“.
“At 54, with retirement a couple of months away, I’m certain that RBI Retail Direct is the fitting alternative for this revenue supply*. Nevertheless, I’m not sure how a lot corpus I ought to allocate to create the revenue ground. The robo software permits me to set the proportion from 0% to 100% of my annual bills and past. Are you able to please recommend a perfect proportion?”
* See: RBI Retail Direct for govt bonds: Who ought to use it and who shouldn’t
First, allow us to perceive what revenue flooring is.
The traditional retirement calculation assumes a corpus X. After retirement, we make investments this X in numerous buckets, and an revenue is drawn every month. We assume that every 12 months, the month-to-month bills enhance at some fee of inflation (6-8% sometimes). If we count on to stay for 30 years post-retirement, the X will scale back to zero at that age. So, the retirement planning calculation has two components: What’s X? How a lot ought to I make investments to get X upon retirement? The robo template may even let you know the asset allocation (how a lot in fairness and the way a lot in mounted revenue) for every year as much as retirement.
Suppose I take a piece of X and purchase a Gilt (authorities) bond with it by way of RBI Retail Direct. Then, a few of my bills shall be taken care of for all times. The remaining bills (which can enhance as a result of inflation) may be dealt with by way of retirement buckets with the remainder of the corpus and another revenue supply. This can be a schematic.
The curve that strikes up represents inflation-indexed bills after retirement. The full revenue from the retirement corpus and different sources should preserve tempo with inflation to match this curve. Part of that is revenue is assured for all times with a Gilt bond buy or insurance coverage annuity and is called revenue flooring,
Given the expense curve above, the reader asks the place I ought to place the revenue ground (the horizontal line). Or, suppose the reader’s annual bills are Rs. 12 lakhs. What needs to be the annual curiosity he ought to get from RBI Retail Direct? Ought to it’s lower than, equal to or greater than Rs. 12 lakhs? This worth may be adjusted as a proportion of annual bills within the robo software.
Naturally, the upper the revenue ground proportion, the upper the full corpus required. Right here is an instance utilizing the robo software/
Inputs and a few assumptions
- Present month-to-month bills that can persist in retirement Rs. 1,00,000
- Annual bills that can persist in retirement Rs. 1,00,000
- Your age on the finish of the present 12 months 55
- Age you want to retire 55
- Inflation earlier than retirement (%) 7
- Assumed life expectancy of youthful partner 90
- Inflation throughout retirement (%) 6
Years to retirement 0 - Month-to-month bills within the first 12 months of retirement: Rs. 1,08,333
- Years in retirement (till youthful partner reaches age 90) 35
Outcomes (related to revenue flooring)
- Whole Corpus required with no revenue flooring: Rs. 3.84 Crores
- Whole Corpus required with 25% revenue flooring: Rs. 4.17 Crores
- Whole Corpus required with 50% revenue flooring: Rs. 4.49 Crores
- Whole Corpus required with 75% revenue flooring: Rs. 4.82 Crores
- Whole Corpus required with 100% revenue flooring: Rs. 5.15 Crores
- Whole Corpus required with 120% revenue flooring: Rs. 5.46 Crores
So, answering the reader’s query is determined by how a lot corpus we’ve. If I’ve a big sufficient corpus, I’ll go for an revenue ground or assured annual revenue of about 110% to 120% of my annual bills. I’d advocate the identical for anybody who can afford to take action.
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