To get 50,000 monthly income for a lifetime, we need to invest a certain sum on a lumpsum basis and then devise a proper strategy for withdrawal. There are several ways to achieve it. If you do not want to do it yourself, you have to rely on some institution to do it for you. One way of doing it is to invest in bank fixed deposits or Post office Fixed Deposit schemes. Another way of doing it to buy an annuity from an insurance company. The third way of getting 50,000 monthly is to invest in equity. Let’s analyze all three options in detail.

Invest in Bank Fixed deposits and liquid funds for monthly income

You can invest in bank fixed deposits or Post office deposits to receive 100% risk-free income. Assuming a 6% rate of interest, you need to invest 1,00,00,000 One crore to receive 50,000 monthly income. But long-term interest rates may go downwards, thus reducing your interest income. If you are a senior citizen, you can invest in Senior Citizen Savings Schemes for higher returns, but there is lock-in of 5 years. You can use a combination of liquid funds and FDs. For ease of operations, keep 12 lakh in liquid fund and set up a Systematic Withdrawal Plan (SWP) for a monthly withdrawal of Rs 50,000. The remaining amount to be invested in FDs in multiples of Rs 5 lakh FD.  

Buy an annuity scheme from an insurance company for monthly income

Using this method also you can ensure a lifetime pension amount. This method is better than the previous method because here, a lifetime pension is guaranteed by the insurance company.

If you invest Rs 1 core as one one-time payout to the insurance company, you can immediately start an annuity. For example, with Rs 1 crore investment amount, HDFC Life provides Rs 58,700 per month lifetime, while MaxLife and ICICIPru give Rs 53,500 and 50,700 respectively.

With a one-time investment of Rs 1,00,00,000 (one crore), you can get a pension for life. The drawback is that your pension amount will remain the same throughout your life. If you want to continue your pension to your dependant (spouse) after you, there are options available.

Investing in equity (Do-It-Yourself method)

In this method, we invest a part of the total amount in equity to generate inflation-beating returns. The good news is that you can do this with a starting amount of Rs 95,00,000 (Ninety-five lakh) only compared to other options. The key benefits with this option are as below:

• Initial corpus: Rs 95,00,000 (Ninety-five lakh)
• Your monthly income increases by Rs 5,000 every year. So, year-2 monthly income would be Rs 55,000. Year-3 monthly income would be Rs 60,000 and so on. Year-10 monthly income Rs 95,000. Year-15 monthly income Rs 1,20,000. Year-20 monthly income Rs 1.45,000. Year-25 monthly income Rs 1,70,000. Year-25 monthly income Rs 1,95,000.
• This arrangement will last for 50 years. Year-50 monthly income Rs 2,95,000
• The portfolio value will peak at Rs 2.2 crore in Year-35. After that, the portfolio value will start decreasing.

This method assumes 12% per annum annualized returns on index funds and 6% per annum annualized returns on FD/ liquid funds.

Now let’s understand the 4 step process:

Step1:

Invest 75% amount (Rs 71,25,000) in a broad-based index fund. Nifty-50 index fund or S&P Nifty500 index fund could be a good option for this. There are only 2 criteria. The fee must be as low as possible and the fund should be from an established fund house with having 10-20 years track record.

Step2:

Invest 25% amount (Rs 23,75,000) in a liquid fund or bank FD. Liquid funds are better in terms of setting up automatic withdrawal instructions. FDs are cumbersome as these are tax inefficient and banks levy penal charges for premature withdrawal.

Step3:

Set up a Systematic Withdrawal Plan (SWP) in liquid fund at monthly intervals for a monthly income of Rs 50,000 for a year. Next year, the same instruction is to be revised for a monthly income value of Rs 55,000 and so on.

Step-4:

Setting up SWP instructions from index fund. This is to be done in year-4, when you exhaust your liquid fund. You use liquid funds for an initial 3-4 years and then withdraw from the index fund.

It is also important to understand the issues in method three. The issue is with the human psyche. Here the period is large. In this method, there is no lock-in. All money is at your disposal. You can withdraw all the money at any point in time. And this is biggest drawback of this method, is that it does not force you to stay invested and use only the withdrawn amount. You need self-discipline to succeed here.

Which method to choose

Now, we have analyzed 3 methods of generating a monthly income of Rs 50,000. Method three of investing in equity is the winner of the three. Still, we recommend that you must choose the method, you are most comfortable with. If you have invested in equity and mutual funds in your working life, you would understand that market returns may remain volatile in the short term, but they generate superior returns in the long term. Seeing your portfolio in red is painful. That’s why we have not touched index funds for the initial 3-4 years. By that time, returns generated would be sufficient to take care of any short-term volatility and therefore, the principal amount remains unaffected.

If you are somebody, who has never invested in equity funds or stocks and is in late 60s, I would advise to stick with the annuity route. If you also want to have full control over your money during the retirement period, then invest in bank FDs.

Now, we have so many digital options and apps at our disposal that, it is very easy to invest and set up SWP without visiting any branch. You can get help from your financial planner for setting up the same.  

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