Retirement is an important phase of one’s life. Post-retirement is the time when you’ll not be employed and to live financially peacefully during this phase savings and investments are required. Hence the reason for considering retirement savings a very important part of expenses right from the early stage of employment. The interest-only retirement is as the name suggests, where the retiree can make use of the interest-rate amount only for monthly expenses.
Working of Interest-Only Retirement
Understanding the working of Interest-Only Retirement is simple. The retirees will build an investment nest. And survive the retirement phase only with interest. The principal amount is not at all disturbed in any case.
For example, if you have $1 Million and you opt for a fixed-income investment that would generate interest annually or half-yearly or monthly. Assuming the interest rate is 5% annually then 50,000$ would be the annual income and you must live with the $50,000 only where the monthly income would be around $4100.
When any unforeseen circumstance takes place with one of the partners, then the spouse will have the $1 Million to survive on.
The interest-only retirement is like a financial guarantee and security which will provide a fixed income periodically.
Is Interest Only Retirement Possible?
For the interest-only retirement concept to work, you need to have an ideal strategy. As the interest on the nest income is going to be your only income source for the entire retirement phase, it is necessary to have a sound plan. The planning will be started with a question, How much do you need per month to live a financially peaceful life? Only when you have a budget that includes all the needs like rent, utility bills, entertainment, medical expenses etc. you will understand how much your nest amount should be.
For example, if you have $1Million for the retirement nest for a 5% annual interest rate, the $50,000 will be provided annually to fulfil the basic needs. If there are any new requirements like house repairs, travel, etc. you have to break the investment nest. Breaking the investment nest will reduce the annual interest.
Therefore, while planning for the interest-only retirement, you need to keep certain aspects in mind like,
- Emergency expenses – In the interest-only retirement nest, you must leave room for emergency expenses like house repairs, car repairs, travel, and other miscellaneous expenses. When emergencies occur you’ll be financially prepared for it without disturbing your basic needs income.
- Inflation – Usually, people planning for retirement, plan all the expenses considering the current market rates and current expenses. But while planning for retirement, you must consider the future prices, that is, inflation must be added. If something costs $100 now after a few years the prices can be hiked to $200 or more. Use an inflation calculator and calculate the inflation. Only when inflation is added you’ll be able to meet the requirements during that phase.
- Time to retire – The interest-only retirement strategy will be ideal if you have a few years in hand to make some money to invest in any fixed-income source. If you already have a good sum of money then you can start to think about the investment products.
- Income source – The income source is a very important part. You need to opt for an investment portfolio with good returns and low risk as you can’t afford even minimal risk at that point in time considering the interest-only from the investment to live further. There are several investment options like fixed-income bonds, deposits by banks and other reported financial institutions that are known for low-risk profile investments.
Interest-only retirement is possible only when the planning is right and well-executed. Missing any important aspect like inflation, emergency expenses or picking the wrong investment product for high returns, etc. can financially impact the retiree badly. It is always recommended to take the help of a financial planner who will suggest the right investment product and also consider inflation. As retirement is an important phase, it is essential to not take any financial risk.
About the author
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.
