Post-Retirement Planning: The onset of your retirement life will not reduce the importance of financial planning, and the retirement corpus created by you in your working years through disciplined investments would still be threatened by inflation and taxes. Increasing life expectancy and rising health costs would only increase the risk of outliving your retirement corpus.
Here are 4 financial moves to ensure the longevity of your retirement corpus:
1. Invest your retirement scheme proceeds in high yield fixed deposits and debt funds
While many retirees are advised to use their lumpsum retirement proceeds (gratuity, provident funds or other retirement schemes) to buy annuities, such investment instruments yield very low returns barely exceeding the inflation rates.
What to do: Estimate your short-term financial goals and invest the proceeds of your retirement schemes in high yield bank fixed deposits offered by small finance banks and a few private sector banks. The highest fixed deposits rates offered by these banks range between 7-9% p.a., which is around 200-300 basis points higher than those offered by PSU banks and most private sector banks. Opening fixed deposits with these banks is equally safe as with other banks as cumulative deposits of up to Rs 5 lakh per customer per bank are covered under the deposit insurance program of DICGC, an RBI subsidiary, in case of bank failure.
Those with higher risk appetite can invest their retirement proceeds in ultra-short term debt funds. These debt funds usually outperform fixed deposits in terms of returns. The surplus money left after factoring your short-term goals can be invested in equity funds based on your risk appetite.
2. Maintain adequate contingency fund
Adequate emergency fund is equally important for a retiree as it is for a working individual. In fact, risks emerging from an inadequate emergency fund would be higher for the retiree as getting loans to deal with financial emergencies would be very tough in the post-retirement phase. Redeeming fixed income investments before their maturity can cost you penalties. Financial exigencies occurring during a bearish market phase may lead you to redeem your equity investments at loss or sub-optimal gains.
What to do: Estimate your mandatory monthly expenses like rent, utility bills, grocery and medical bills, insurance premiums, EMIs, etc for at least six months and park that amount in high yield savings account. Those at ease with internet or mobile banking can park their emergency funds in fixed deposits.
3. Ensure adequate health insurance cover
Given that old age makes you prone to diseases and injuries, the significance of having adequate health insurance becomes even more imperative. The combination of increased life expectancy and high inflation rate in medical sector services will increase your total medical costs further. Without any employer-provided group health insurance cover, your retirement corpus will be the sole source of covering your health cost. This will increase the risk of faster depletion of your retirement corpus.
What to do: Purchase an adequate health cover, even if it comes at a higher premium. If you already have it, opt for top-ups from your existing health insurer to cover the deficit resulting from the withdrawal of your employer-provided health cover. The premium charged on top-up health covers would be lower than purchasing an additional health insurance policy.
4. Continue to remain invested in equities
Investors are often advised to redeem their equity exposure for debt funds and fixed income instruments as they approach their retirement age. However, fixed income instruments usually fail to beat the inflation rates. The returns for those in the higher tax slabs would be lesser even after deducting the tax from the inflation adjusted income. With increasing life expectancy and rising health costs, a complete shift to fixed income investments might increase the risk of outliving your post-retirement corpus.
What to do: As equity as an asset class beats fixed income instruments and inflation by a wide margin over the long term, continued exposure to equity is important for your retirement corpus to outlast you. Hence, instead of shifting your entire equity exposure to fixed income products at one go, opt for a staggered shift. First, identify your monthly mandatory expenses and short term financial goals and then, activate Systematic Transfer Plan (STP) in your equity funds to shift to ultra-short duration debt funds. Then, activate a systematic withdrawal plan (SWP) in those ultra-short duration debt funds to receive monthly cash flows to meet your daily expenses and short term financial goals.
(The author is CEO & Co-founder, Paisabazaar.com)
