Three Thumb Rules To Ensure Steady Cash Flow After Retirement

Retirement marks the transition from earning to spending from what one has accumulated over the years. For many people, the challenge is not in accumulating wealth, but ensuring a regular cash flow and that the money lasts their life spans. Pension addresses this issue, but unfortunately, India is not a fully pensioned society at present. According to Niti Ayog’s position paper titled ‘Senior Care reforms In India - Reimagining the Senior Care Paradigm’, published in 2024, around 78 per cent of the elderly population in India live without pension coverage, and around 70 per cent are dependent on others for routine expenses. This data shows the urgent need to plan money in such a way that cash flow continues not only in working years but throughout life.

As managing a steady cash flow requires discipline and planning, here are three rules that can help maintain cash flow, financial stability, and peace of mind in one’s golden years.

Maintain Balanced Allocation For Sustainable Growth

One of the most important steps is a balanced portfolio allocation. It starts with investing money in instruments that can generate high returns while balancing risk. In short, preserving capital while taking some exposure to equities to keep up with inflation, if not beat it.

Experts suggest various rules, and one may consider following them based on one’s profile and risk tolerance. However, the simplest rule to determine equity exposure is 100 minus your age. For example, if a person is 75 years old, then 75 per cent should go into debt instruments, pension funds, etc., and the remaining (100-75) 25 per cent of the portfolio in equity-related instruments.

There are other rules as well, like 30 per cent in short-term and liquid assets like fixed deposits, liquid mutual funds, next 30 per cent in regular income products like annuities, senior citizens saving scheme (SCSS), post office monthly income schemes, etc. for regular income, and remaining 40 per cent in the long term growth assets, such as equity related instruments for portfolio growth.

The idea is to create a portfolio with such an asset allocation that can provide a regular cash flow, along with keeping up with inflation.  

Limit Withdrawals - The 4 Per Cent Rule

The next step is withdrawal; literally taking out money from the accumulated corpus at a certain frequency. Here 4 per cent withdrawal rule comes into play. Per this rule, one should withdraw not more than 4 per cent of the total retirement corpus. However, it is not a rigid rule. If the market performs well and inflation rises, one can withdraw a bit more, and during market downturns, one may reduce withdrawals to maintain a sustainable corpus. So, if one retires with a Rs 1 crore corpus, withdraw Rs 4 lakh in the first year, and increase or decrease it next year, depending on inflation and market conditions. According to experts, by following this rule, the funds may last for around 25 to 30 years of retirement under normal circumstances.

So, when the inflation is low, one should withdraw less to maintain the corpus, and vice versa. If a person withdraws too much and too fast, it would be a risk to run out of money, and not withdrawing enough money will mean denying yourself the full benefit of the savings. So, take it as a thumb rule, but keep evaluating and tweaking it as per inflation, retirement age, life expectancy, and market conditions to sustain the corpus.

Build An Emergency Fund

At last, too much withdrawal suddenly can easily derail the planning, despite having invested in high-return instruments. So, for financial exigencies, it is vital to maintain a separate emergency fund, enough to meet unexpected medical expenses, home repair, or other family emergencies. For medical issues, insurance offers the solution, but at times when claims are not covered or not settled in a timely manner, emergency funds can be used. According to experts, emergency funds equivalent to six to 12 months of expenses should be kept in easily accessible instruments, such as fixed deposits, liquid MFs, etc.

An emergency fund provides a necessary buffer and keeps other long-term investments and assets intact. It also provides peace of mind and confidence to face any emergency in case it arises.    

There are various investment instruments that offer monthly income, but to utilise the instruments fully and maintain a constant cash flow, one should regularly balance asset allocation, expenses, and liquidity.