Retirement planning isn’t about having a large corpus; it’s about having enough money that lasts your entire lifetime without running out. For millions of Indian households, the fear of running out of cash post-retirement is real.

To avoid running out of cash in retirement days, nowadays investors employ a well-structured plan with strategic buffers such as an extra 10% cushion, which can dramatically reduce the chances of running out of cash in the golden years.

In this blog, we’ll understand why that extra 10% is important, how you should plan your retirement withdrawals and use a combination of strategies for resilient retirement planning.

The retirement challenges in India

Retirement planning in India is not as easy as saving a fixed sum of money. Unlike earning years, when your regular monthly income pays for your living expenses, retirement requires you to provide a predictable income from your savings, maybe for 20-30 years or more. There are several factors that make this difficult. Some of them are:

• Inflation: Things that cost ₹1 lakh today might cost ₹3.21 lakh at 6% inflation in 20 years, if inflation continues to persist in the upcoming years.
• Longevity risks: Due to awareness, education, and improved technology, Indians are living longer, which means retirement can last for decades after the last salary cheque is received.
• Unpredictable expenses: Health care costs, financial emergencies or family support needs don’t follow a script and can pop up anytime, leading to big expenses.
• Market volatility: Depending on only investment returns without adequate liquidity exposes retirees to the sequence of returns risk.

To deal with these uncertainties, having a well-defined strategy with an extra 10% cushion is not a luxury; it’s a necessity.

What does an extra 10% mean?

When planners talk about an extra 10% while planning for retirement, it means not only 10% more corpus but also maintaining a 10% cash reserve or buffer. Here’s why a cash reserve also matters, along with  10% more corpus:

Cash reserves increase the longevity of the investment

Having a cash reserve significantly increases the odds of being able to maintain a retirement income because you don’t have to sell investments at depressed prices when markets are down. Being able to have that extra reserve enables you to:

• Cover expenses in emergency times without having to sell growth assets.
• Ride out the market volatility while the larger portfolio continues to grow.
• Avoid making any kind of irreversible mistake, such as selling equities at market lows.

This buffer is similar to an insurance policy, one that helps to buffer the impact of short-term changes in the market and unexpected costs.

A larger reserve gives psychological comfort

Financial security is as much a state of mind as a financial reality. Knowing you have a comfortable cash cushion for 6 months or 12 months’ expenses means less stress, and you are committed to your long-term plan without panicking.

Fighting inflation more effectively

Inflation is the silent wealth killer for an investor. It depletes the investors’ buying power over a period of time. Increasing the SIPs by 10% every year and having a cash buffer helps investors mitigate the influence of inflation on their retirement corpus.

This integrated approach of SIP growth + 10% cash buffers + disciplined withdrawals helps investors mitigate the risk of going out of cash in retirement years.

SWP and Step-up SIP for sustainable retirement income

To create a reliable cash flow in retirement, an investor can follow a two-step plan:

Stage 1 – Accumulation: Grow your wealth with consistent and systematic investments, like a Step-up Systematic Investment Plan (SIP).

Stage 2 – Distribution: Draw money from your wealth with a Systematic Withdrawal Plan (SWP) without exhausting your wealth too soon.

Let’s explore both:

Step-up SIP

A Step-up SIP allows investors to invest fixed sums at regular intervals, and increase this amount by 10% every year, allowing investors to reap the benefits of compounding, rupee-cost averaging and building disciplined investing. Tools like step up SIP calculator help investors plan this better.

Step-up SIP helps investors accumulate a much larger corpus than flat SIP contributions. This is particularly useful in India, where income often increases with experience. Having a step-up SIP not only matches investors’ cash flows but also helps beat inflation over time. 

SWP (Systematic Withdrawal Plan)

After retiring and saving a large corpus, it is important to withdraw it in a planned manner, the corpus may get depleted prematurely. This is where the SWP is vital. A Systematic Withdrawal Plan (SWP) allows investors to withdraw a predetermined amount from their investment at regular intervals, serving as a steady income stream.

A SWP Calculator helps investors estimate how long their retirement corpus will last with their current withdrawal frequency and amount. With a well-built SWP strategy, retirees can withdraw their required monthly income while potentially preserving their capital and allowing it to last by outpacing inflation.

Where to keep the cash buffer?

Having a cash buffer is not enough; where to park this buffer is also important. Investors can maintain their cash buffer in the following instruments: 

Savings accounts

A savings account provides high liquidity, meaning investors can have immediate access to their money in times of an emergency. While the return is relatively low, savings accounts are a suitable option for parking short-term emergency money.

Liquid mutual funds

Liquid mutual funds invest in money market securities, providing a steady return on investment with a high degree of liquidity. This type of fund is used for parking money and keeping it safe for a short period.

Overnight mutual funds

Overnight mutual funds invest in securities with a maturity of a single day. This type of fund has the lowest risk and provides high liquidity. This type of fund can be used by an investor to park money and earn an attractive return without keeping it for a long period.

Short-term fixed deposits

Short-term fixed deposits made in a bank for a period of 6 to 12 months can be used as a buffer for retirement emergencies. These deposits offer predictable returns with the funds remaining relatively accessible.

Ultra-short duration funds

Ultra-short duration funds have a longer maturity than liquid funds and can earn a higher return than a savings bank account or a liquid fund while providing high liquidity. 

Common mistakes to avoid

Being aware of common mistakes can guide your investment journey in the right direction. Here are a few to watch out for:

Underestimating inflation

One should be aware that inflation has a major effect in the long term. You should be aware that in 20 to 30 years, due to inflation, your savings may be reduced to a considerable extent. 

Ignoring healthcare expenses

Healthcare costs should be taken into account while investing in retirement plans. In most cases, it has been seen that healthcare costs rise at a faster rate than inflation. Therefore, it would be wise to invest in health insurance to avoid any financial hurdles in the long term.

Over-reliance on property

Real estate is an important asset for many Indians. However, it would be wise to invest in other options as well, rather than solely relying on property for retirement plans. The reason behind this is that property investments do not have high liquidity to meet instant financial requirements in case of emergencies.

Lack of portfolio review

A set it and forget it approach to your retirement portfolio is risky. Market conditions, risk tolerance and financial needs change; therefore, the portfolio needs to be reviewed and rebalanced periodically to meet your financial goals and market conditions.

Emotional decision-making

Panicking during market downturns and impulsively making withdrawal or selling decisions at a loss can be a serious setback to your corpus. This is where the psychological comfort of that extra 10% comes in, and helps you ride out the market volatility without making any mistakes that you can’t take back.

The power of diversification

A diversified retirement portfolio is one of the cornerstones of robust financial planning, in addition to saving that 10% more and strategically withdrawing funds. Diversification refers to the allocation of funds to various classes of investments, industries, and geographical locations to reduce risks and maximise potential returns.

An ideal retirement portfolio should have a balanced allocation of equities in the form of mutual funds or stocks, fixed-income securities in the form of fixed deposits, bonds, and debt funds, and gold, which helps to mitigate risks of inflation and economic volatilities.

Conclusion

The journey towards a financially sound retirement, especially in the fast-paced Indian economy, requires foresight and discipline. That extra 10% is not just an amount; it’s a state of mind towards a strong and stress-free retirement. By adding an extra 10% through the Step-up SIP option, an extra 10% in cash reserves, and an SWP option in retirement, you can insulate yourself from inflation, market volatility, and unexpected expenses.

The use of tools such as the step-up SIP calculator can help your savings compound over time, while the SWP calculator can help support this strategy. Avoiding common mistakes and adopting diversification will ensure that your carefully planned portfolio continues to work for you in the golden years of your life.