One of the key requirements during retirement is to ensure the presence of cash flow to meet the various regular expenses that arise in that stage of life. The whole effort behind building a retirement corpus is to ensure that the money is available when it is needed in the later years.
There are various ways in which people meet their retirement fund needs, but taking care of a few factors will ensure that there is no disruption in the process. Here are some of the vital factors that would guide the action.
Cash Flow Required
There are various investments where the earnings or part of the earnings are paid out in the form of distribution, and this will represent a cash flow for the investor. Here, there is nothing that the investor needs to do with the investment because the payout is coming automatically. Various types of debt investments are prime examples of this where the interest payment is made at a specific time interval so the investor will get the amount directly into their bank account.
Even when it comes to equity investments, if there are dividends earned from direct holding of stocks or mutual funds, then the amount will come into the account automatically. This is different from the investor having to withdraw the specific amount that they want or have decided upon at a specific time interval.
Depending on the amount of total cash flow required and the amount of such automatic payouts, the investor has to then plan out how much they need to withdraw on their own.
Protecting, Preserving Capital
The source from where the money is coming from is very important as far as the overall retirement planning process is concerned. This is because if the money being used is resulting in the reduction of the capital or the corpus that has been accumulated by the individual, then there has to be another calculation in terms of how long the total corpus will last for the individual.
This becomes necessary, otherwise, there is a good chance that the investor will run out of money even while they are still in old age. This is the situation that every person has to avoid because there are not many options left during old age to increase the corpus, so protection and preservation of corpus has to be one of the factors that needs to be given high priority.
Taxation Impact
One of the main goals for an individual has to be that they should not have a very heavy tax burden. If this is not given attention, then taxation can eat up a large part of the earnings and this means lesser amount available for the purpose of use for other needs.
Planning has to be done in an effective manner so that the tax impact is limited because this will come out of the total earnings, and this has to be minimised. Income in the form of capital gains can reduce the tax burden, especially since these are normally taxed at lower rates as compared with regular income. Similarly spreading out the receipts to lower the tax impact can also be one of the routes adopted.
Flexibility
There also has to be some amount of flexibility in the manner in which the amounts are being used for retirement. This is helpful because it will take care of the various changes that are taking place for an individual.
For example, there might be a year in which the cash requirement is very less or it could be higher than what has been thought of. The overall planning has to be such that these kinds of things are taken into the process and then completed rather than there being little flexibility to change the situation. The flexibility will ensure that the needs are met and at the same time, a larger amount is available when required for the purpose of various expenses.
The writer is the founder of Moneyeduschool.
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