Enough isnt enough

Written by Saikat Neogi | Updated: May 16 2014, 10:51am hrs
Risks from volatile markets and fluctuating interest rates are the two biggest dampeners for retirement corpus. Also, rising life expectancy raises longevity risk, which means a retired person may outlive his investments and the corpus may not be enough to sustain the desired lifestyle post-retirement.

So, the foremost challenge is to make inflation-proof investments as rising prices will erode the value of money. And, to make the best of your investment and, yet, stay risk-averse, retirement planning must be a continuous process with an appropriate asset allocation strategy comprising equities, debt, gold and, even, real estate.

After the accumulation period is over during one's working life, chalking out the annuity income and regular cash flows is the next milestone. During the accumulation period, regular review and re-balancing of portfolios is required to meet the requirements of a retired life. With some deft planning, it will not be a daunting task to plan and rejig investments that earn steady income and counter inflation.

A report by global consultancy firm EY estimates that for a person earning R10 lakh per annum at the age of 30 and retiring at the age of 65 years, the retirement corpus would cover expenses after retirement for eight years only, whereas he can be expected to live much longer (around 16 years or more) as per the current life expectancy rates. So, the the annuity income would barely cover half the expenses after retirement.

Analysts say one's post-retirement portfolio should be built on the basis of the current risk-tolerance level. Since only 10% of India's working population has any form of social security, early retirement planning is important to maintain the current living standards. One must look at the risk profile and invest required amounts in products that help generate returns. Most importantly, one should invest in products that one understands. Re-balancing portfolios ensures that the investments do not over-emphasise on any particular asset category. Selling investments from over-weighted categories and using the money to invest afresh in under-weighted categories will help reap profit and escape longevity risk.

Data from the Census show that more than 60% of the country's population is in the age group of 1559 years. While, on one hand, this is a demographic dividend of which the country is proud of, on the other, the percentage of its population that is above 60 years is increasing every year due to improved longevity, driven by an enhanced focus on health care, rising income levels and a better standard of living in the country.

By 2030, 12% of the country's population will be in the age bracket of 60-plus, which translates into 180 million people higher than that of many developed countries.

Any retirement portfolio should have two components. One that earns the minimum income to sustain a basic lifestyle through annuity and monthly income plans and the other that gains from the upside through select equity exposure. The portfolio should be monitored at regular intervals and provisions for contingencies made. Fixed income, which protects capital, is a major part of retirement investment.

If you are looking for regular cash flow from your investments in mutual funds, a systematic withdrawal plan (SWP) will help automatically redeem a predefined amount of your investment at regular intervals. Asset management companies cater to two types of investor needs one, where an investor withdraws a fixed amount every month, and the other where an investor withdraws only the capital appreciation and not the initial capital.

In an SWP, if one has invested for less than a year, short-term capital gains tax would be applicable. However, if withdrawals are made after a year of investment, long-term capital gains would be applicable. SWP also helps an investor, especially a pensioner, to work out the cash flow as per one's requirement. Let's assume that a retired person requires R20,000 a month to meet his monthly expenses. Assuming that he receives a pension of R10,000 a month and R5,000 as interest from fixed deposits, he can set up a SWP on an equity fund to generate a cash flow of R5,000 a month.

The problem, however, arises when the equity fund suffers a sharp decline in net asset value. The investor would then be withdrawing more capital and getting less capital appreciation. Though SWP is a no-charge service, mutual fund houses, at times, charge an exit load if the investment is redeemed before six months to one year.

Post office savings are popular with fixed income seekers. In a postal monthly income scheme, one can invest R4.5 lakh in a single account and R9 lakh in a joint account. Other similar schemes include the five-year and 10-year National Savings Certificate. State-owned and private insurance companies, too, offer fixed annuity pension products.