Already retired or retiring soon? Consider your investment options carefully.

Do you have sufficient corpus at retirement?

First things first.?Ask yourself this question – do I have sufficient corpus at retirement?

A typical white-collar worker would have already made some savings / investments during his / her working life.?At retirement, he / she may also receive large lump-sum amounts from the employer – in the form of gratuity payment and Provident Fund (PF) dues. Certain employees may also receive a regular monthly pension during retirement through their employer-sponsored superannuation schemes.?At a first glance, this total corpus at retirement may appear quite large!???

However, consider this - Assuming you retire at the age of 60, you may have a good 15-20-25 years of retirement life during which you may not have any regular form of income.?You will continue to incur expenses though, which will keep increasing at future inflation rates.?Would the total corpus at retirement still seem large if you consider this?

A projection of your likely expenses and outgoes into the future would enable you to assess whether or not the total retirement corpus would sustain your lifestyle and meet all your expenses and outgoes during retirement.?If it turns out that you do not have sufficient corpus at retirement, you may need to start taking actions early on.?These may include, for example:

• Extending your working life or earning additional income during retirement;
• Controlling your expenses; and
• Devising an investment strategy that provides a higher investment return.

Consider your changing needs and objectives

Unless you receive a pension during retirement, you may not have any regular form of income and yet would need to meet your ever-growing expenses.

Surely, some of your expenses might come down during retirement.?For example, if you don’t need to travel to work every day, your conveyance expenses would significantly reduce.?Similarly, if your children are already financially independent, you may not incur expenses on their education, career etc. ?Perhaps your mortgages may also (hopefully) have been paid-off by then.

However, some of your expenses are bound to increase during retirement.?Most notable of these are your medical and healthcare related costs.?These may increase very rapidly, owing partly to your old age and partly due to the medical inflation itself – which is a lot higher than the general inflation levels. ?You may also wish to go on more frequent holidays and expenses related to this may increase.?If you have any outstanding mortgages, you may also wish to pay off the same.?Perhaps, you may also be aiming to gift your children / grandchildren part of your estate at some stage in the future.

Considering this, your investments during retirement should be able to meet the following fundamental objectives –

1. Providing adequate liquidity – Given that you may not have any regular form of income during retirement and yet need to have funds to meet your daily expenses and other outgoes, your investments should provide adequate liquidity.
2. Providing high, net of tax investment returns and protection against inflation – Your expenses may continue to increase in the future. Unless your investments provide a return that beats this inflation, the ‘purchasing power’ of your investments would erode over time.?Hence, your investments should provide a sufficiently high, net of tax return, to provide protection against inflation applicable to your expenses.
3. Providing adequate security of investments and stability of returns – Depending on your risk-appetite, you may wish to have investments which are more secured and which provide less volatile investment returns from year to year, than what you might find acceptable during your working life.

Relative merits of alternative investment strategies

A] Bank Fixed Deposits (FDs) and similar types of fixed interest instruments (e.g. National Savings Certificates, Kisan Vikas Patra etc.)

This has been the most common form of investment typically found amongst the retirees.?Many banks also offer a slightly higher interest rate to senior citizens, to attract them to place new FDs.?

Some retirees invest in FDs in such a manner that the maturity proceeds are available at successive intervals, e.g. Rs.5 lakhs in FDs maturing in each of years 1, 2, 3 etc. from now. Any ‘excess’ of the maturity proceeds from the FDs over the expenses and other outgoes that may be incurred, are then re-invested for the longest duration of FDs available at the interest rates applicable at the time of such future re-investments.?

Many retirees prefer such ‘laddering’ of FDs as it provides them the desired level of liquidity.

Some also tend to invest large lump-sum in FDs that provide regular (e.g. monthly / quarterly) interest, which acts as a source of regular income for them.?Naturally, they might not renew the FDs for the full amount, if the interest income turns out to be insufficient to meet their outgoes and they need to rely on the principal amount invested. ?

The pros and cons of this investment strategy are discussed below:

B] Corporate bonds / other fixed interest securities

Given that the bank FDs and other similar instruments offer a relatively low interest rate, some retirees prefer investing the retirement corpus in the bonds or fixed interest securities issued by corporates.?The main objective is to gain a higher level of interest rate on such investments.

Indeed, depending on the credit rating of the corporate concerned, one may be able to get a higher level of interest rate on these instruments as compared to those available on bank FDs.?However, there may also be the risk that the corporate may default on the payment of interest and / or the principal amount itself.?There have been several examples of such defaults in the past.?

The pros and cons of this investment strategy are discussed below:

C] Immediate annuities provided by life insurers

Some retirees prefer receiving a guaranteed monthly income in the form of a pension.?They end up investing their retirement corpus in the immediate annuity plans offered by life insurers, which provide them a guaranteed income for life.

Some of these annuity plans also provide a lump-sum upon the eventual demise of the retiree.??There are also plans that offer an increase in the annuity amount (e.g. 3% each year), which provides at least a partial protection against future inflation. There may also be other options including spouse’s pension, annuity guaranteed for a certain period irrespective of the survival status of the retiree etc.

The pros and cons of this investment strategy are discussed below:

D] Equities / equity oriented mutual funds (MF)

Some retirees may invest their retirement corpus in equities / equity oriented mutual funds.?

Several MFs offer a ‘systematic withdrawal plan’ (SWP) type facility, allowing the investor to withdraw the desired level of funds at regular (e.g. monthly) intervals, to meet his / her daily expenses and other outgoes.?The balance investments may continue to fetch a higher investment return over the longer term.

Alternatively, retirees may maintain as much funds in relatively ‘safer’ avenues (e.g. FDs, government bonds etc.) as are needed to meet the expenses and outgoes for a specified period (e.g. for a year or two), with the remaining funds invested in equities / equity oriented mutual funds. Arguably, such an investment strategy may be considered to be providing adequate level of liquidity and yet generating high, inflation beating investment returns in the long term.

The pros and cons of this investment strategy are discussed below:

E] “Reverse Mortgage”

This is strictly not an investment strategy, but a mechanism to receive a lump-sum or a regular income during one’s retirement.?If you own a self-occupied residential property, but don’t have a sufficiently large retirement corpus, this may be an ideal mechanism for you to get additional funds to provide for your retirement.

You may receive a loan from the bank for a longer period (e.g. 15 - 20 years) against your self-occupied residential property.?The loan may be extended either as a lump-sum or in the form of regular (e.g. monthly / quarterly etc.) income to you.?You are not required to pay interest / repay the principal amount of the loan during your lifetime.?However, upon your eventual demise, the bank would recover the outstanding loan amount (with interest) by liquidating your residential property.

Although typically, banks charge a high level of interest on such loans (currently around 12% p.a.), for the retirees who are in financial need, this may be a good avenue to monetise the equity value from their self-occupied residential property.

The pros and cons of this strategy are discussed below:

Conclusion

There is no one ‘right’ formula that would meet the needs of all retirees during retirement.?

You may need to carefully assess your available corpus at retirement, your expected lifetime post retirement, projected expenses and other outgoes and consider your risk appetite whilst devising an investment strategy during retirement.

It is, however, important to generate an investment return that is ‘high enough’ so that you can at least meet your increasing expenses and sustain your lifestyle during retirement. ??

You may also be able to validate your strategies by logging into your Fin4sight? account at www.wisdom2wealth.co.in.