How to Build an Additional Income Stream Before Retirement?

2022-04-02

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What will you do if you had an income without having to work? Perhaps work more, just for fun. However, building an income stream which works regardless of whether you do or not should be a priority for you. But how do you achieve this feat is the tough question.

You can use multiple investment options including ULIP schemes for your goal. However, before you select the investment option, you need to have a few numbers clear.

Here’s a step-by-step process to help you achieve our regular income goal:

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Step 1: How Much Income You Need?

The question could be interpreted as ‘the amount of income you need’ or ‘the amount you want’. What you will need to consider is that the higher amount of income you want the higher you will need to invest, and perhaps longer too.

But what should be the basis of this goal? You can include several factors, however, the following two will be the most important:

Household and lifestyle expenses for you and spouse
Regular healthcare expenses

Also, remember that your income will need to be inflation-adjusted over time. So, it cannot be a fixed amount for a long time.

Thus, if your current total for these two expenses is Rs. 30,000 a month, 20 years later this will be close to Rs. 60,000 a month. Also, this amount should grow at a specific rate for inflation after your income starts.

Expense Scenario Just Before Your Retirement:

Since this goal is to start an income before your actual retirement, you can aim for the minimum amount you need to maintain your lifestyle.

You should try to imagine your expense scenario 5 to 10 years before your retirement. These 10 years between 50 to 60 are the years when you will see some of the largest financial goals fulfilled.

Child’s higher education, marriage and apart from the related expenses your personal lifestyle cost would be pretty low.

Thus, if you can have a source of income which fulfills this need for you, you are free to use 80-90% of your monthly income towards investment in these years.

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Step 2: How Much Can You Invest Now?

This is an important question for you to consider, as we can set too high a benchmark for our goal. But our current reality will have a defining say if the goal is practical or not. Understand that you should keep this goal separate from other financial goals, including retirement, with this goal.

So, how much can you allocate every month towards this goal now?

Given that you are already investing towards multiple other goals, you can aim to allocate anywhere between 10 to 30% of your income for this goal. So, if you are earning Rs. 1 lakh a month, you should aim to invest about Rs. 10,000 to 30,000.

The best way is to ensure you can invest the same amount as your present expense rate for this goal. For example, if your necessary household and healthcare expense is Rs. 30,000 now, invest close to this amount.

Step 3: How to Use the ULIP Plan for This Goal?

ULIP plans from Canara HSBC Life, allow you to continue your ULIP policies till the age of 80 under normal plans. However, if you expect to surpass this age you can also choose the lifetime option which will cover you till the age of 100.

Once you have decided which plan to use. Here’s what you should expect from this investment, assuming you invest Rs. 25,000 p.m.:

Your ULIP policy term is 100-your age; i.e. if you are 30 years of age now, the policy will continue for 70 years or your death whichever happens first.
You will be investing Rs. 25,000 per month into the plan for the next 20 years
Your life cover under the plan would be Rs. 30 lakhs; i.e. 10 times of your annual investment
The total corpus you accumulate will be close to Rs. 1.5 crores by the age of 50; i.e. in the next 20 years
After 20 years you will start withdrawing Rs. 60,000 p.m. from the corpus, which is equivalent to your present-day necessary living cost
The withdrawals will keep growing at 3.5% every year to adjust for inflation
You can continue withdrawing from the plan so far as the corpus balance remains above Rs. 30 lakhs after withdrawal

The last point is important, as the ULIP plans deduct mortality charges from the corpus. While, till the age of 60, mortality charges are relatively low, they start rising dramatically after 60.

But mortality charge is deductible only when your corpus is below the sum assured of the policy and only on the balance amount.

For example, in this case, your life cover under ULIP scheme is Rs. 30 lakhs. If your total accumulated corpus in a policy year is Rs. 10 lakhs, mortality charges for the balance Rs. 20 lakhs will be deducted from the corpus.

This also means that the moment your corpus grows more than the life insurance sum assured, the mortality charge on your policy will become zero.

What to do if your corpus goes below sum assured after 60?

In case you have to withdraw an excess amount from the plan and your corpus happens to drop below Rs. 30 lakhs (in this case), you can apply to surrender the policy. But, do keep in mind the following points:

If you have been following your investment and withdrawal plans religiously, this situation will not arrive
You are likely to have enough surplus to leave a large estate for your next generation
Remember this income plan is separate from your normal retirement plan
You can surrender the policy but, check the mortality charge on the policy first. If the gap is not high, the mortality charge would be low enough to be covered by the policy earnings within the year.
Surrendering the policy also means that you lose one option of leaving a tax-free estate to your loved ones

Benefits of this Income Plan:

This is the most important part. The benefits of using ULIP schemes for creating an additional income stream for you could be better than other plans. Here’s why:

Multiple asset allocation options. Invest in equity, balanced or debt funds and use liquid funds to keep your corpus safe before a withdrawal
Automatic portfolio management for better risk management while investing in equity funds
Moving money between funds within the ULIP is not taxable
Partial withdrawals after the lock-in period of five years are completely tax-free

The only limitation with ULIP schemes is that you cannot invest more than 10% of the sum assured in any given financial year. Not because the ULIP plan would not allow, but because the excess investment in any FY will eliminate the tax benefit on maturity value.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.