The absence of regular income severely limits the risk-taking capacity of senior citizens and the safety of capital becomes the topmost priority.
With no source of regular income, managing their finances well is a major task for senior citizens – except for a few fortunate people – in order to generate a regular flow of money without depleting the retirement corpus.
The absence of regular income severely limits the risk-taking capacity of senior citizens and the safety of capital becomes the topmost priority even as rate of return is important to get a decent money flow to sustain.
The current low-interest regime and variable rate of inflation make the situation further worrisome for the elderly people. This is because the low rate of interest not only affects the money flow adversely, but the higher inflation even eats up the purchasing power of the capital invested.
So, generating return without taking capital risk is a tightrope walk for senior citizens, which needs a great balancing act.
Following are some steps that senior citizens may take to manage their finances:
An emergency fund is where you can put the money required for immediate consumption. With the health condition getting vulnerable at the old age, ready availability of money is absolutely necessary to meet any health emergency.
Apart from keeping some cash at home, the money needed for emergency use could be parked in a bank account or in liquid funds. Return is the least important criteria here.
In the absence of regular income, senior citizens need to have periodical money flow to meet daily expenses. As the risk tolerance level is very low in the absence of regular income, safety of capital invested has utmost importance to generate money flow through short-term investments.
To meet your regular income requirements you should put money in safe fixed-income instruments, like high-quality short-duration funds. Safety of capital is more important and return may be modest to get sufficient money flow to sustain the post-retirement life.
However, the purchasing power of capital gets deteriorated over time as fixed-income investments are mostly inflation inefficient.
Equity and Debt
To cope up with rising cost of living due to inflation, higher money flow will be needed in the long-run. As fixed-income instruments may hardly beat the inflation, investments in such instruments won’t help you in keeping pace with the rising cost of living.
So, you need to have a combination of equity and debt in your investment portfolio to provide you with returns that can beat the rate of inflation and to provide growth in purchasing power of the money invested.
You need to invest about 20-30 per cent of your retirement corpus in Balanced Funds to keep pace with inflation in the long run.