A calculated approach is necessary if you want to ensure a comfortable life after retirement
With increasing life expectancy and inflation, retirement planning has become a critical part of financial planning. 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.
The corpus you build for your retirement should be able to maintain your desired lifestyle. Risks from volatile markets and fluctuating interest rates are the two most important dampeners for retirement corpus and, many a times, the corpus one wishes to have on retirement may not be achieved with the planned savings. The earlier you recognise this shortfall, the better, as it will help you to reach the goal more efficiently.
Retirement age is usually 58 years in most companies in India. Some people would like to retire earlier, which must be factored into the financial plan. Also factor in life expectancy of 70-80 years, depending on your situation. Next, you must add the inflation factor to understand how much your expenses will grow between now and at the time of retirement.
The foremost challenge is to make inflation-proof investments since 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 of equities, debt, gold and real estate.
After the accumulation period is over during one’s working life, chalking out the annuity income and regular cash flows are the next milestone. During the accumulation period, regular review and re-balancing of portfolios is required to meet the requirements of retired life.
With some deft planning, it will not be a difficult task to plan and rejig investments which earn steady income and counter inflation.
Most Indians prefer life to invest in instruments like insurance and fixed deposits to build a retirement corpus.
About 60% use savings accounts to prepare for retirement, which constraints their ability to earn higher returns. A recent Aegon Retirement Readiness Survey finds that products with easy-to-use access to tracking and management of retirement savings would encourage close to 40% of working Indians to save for 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 one’s 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 fresh in under-weighted categories will help reap profit and escape longevity risk.
The first step would naturally be to increase your savings for retirement between now and when you retire. One must save in higher yielding instruments from the beginning.
Equity returns, either through direct investment in stocks or mutual funds, are ideal over the long term, and are higher than what is earned in typical retirement avenues like provident fund and fixed deposits. When you near retirement, you can gradually de-risk to debt instruments. Even post-retirement, you can consider investing partially in equity or balanced mutual funds, after analysing your risk tolerance. 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, which gains from the upside through select equity exposure.
The portfolio should be monitored at regular intervals and provisions for contingencies made. You can invest your money in bonds or fixed deposits, which give a regular payout. Or, you can build a regular income from your second home in the form of rental income. Although it is important not to completely depend on rental income, you can plan for this, which will reduce your retirement corpus needs.
Also remember to consider all income streams like inheritance or any other sizeable one-off income that you may receive.
The need to earn higher returns must always be weighed against the risk you are willing to take, and an appropriate balance must be struck before embarking on any option. If you are looking for regular cash flow from your investments in mutual funds, a systematic withdrawal plan (SWP) will help you automatically redeem a predefined amount of your investment at regular intervals. SWP helps an investor, especially a pensioner, to work out the cash flow as per one’s requirement.
You can consider reverse mortgage of your house as a backup. This means if you are a senior citizen owning a house or property, you can mortgage this with a bank in exchange for a regular payment. While it is popular abroad, it has not caught up in India, as the bank has the right to sell of the property after the borrower passes away to recover the loan.
* Consider your risk appetite before investing required amounts in products that help generate returns
* Invest in products that you understand
* Re-balance portfolio to ensure that investments do not over-emphasise on any particular asset category
* Sell investments from over-weighted categories and use the money to invest fresh in under-weighted categories to reap profit and escape longevity risk
* Increase your savings for retirement between now and when you retire. Save in higher yielding instruments from the beginning
* Equity returns, either through direct investment in stocks or mutual funds, are ideal over the long term
* When you near retirement, gradually de-risk to debt instruments
* Even post-retirement, you can consider investing partially in equity or balanced mutual funds, after analysing your risk tolerance
* 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, which gains from the upside through select equity exposure
* Monitor portfolio at regular intervals and provide for contingencies
* You can invest your money in bonds or fixed deposits, which give a regular payout. Or, you can build a regular income from your second home in the form of rental income
* Although it is important not to completely depend on rental income, you can plan for this, which will reduce your retirement corpus needs