An individual’s investment lifecycle can be divided into two phases; accumulation phase and the withdrawal phase. In the accumulation phase or the pre-retirement phase, an investor tries to save and accumulate as much as possible by setting aside and investing from one’s regular income. This accumulated wealth is relied upon to sustain the withdrawal phase or the post retirement period. One must have read a lot about financial planning during working life, but not much is discussed about post retirement planning.
Many of us believe that once we retire, our expenses will also come down. Well, that’s rarely going to happen. On the contrary, along with maintaining the same standard of living, some new expenses also get added. Medical expenses are likely to form a meaningful part of one’s monthly outflow, one might want to pursue some hobby which earlier didn’t feature on one’s priority list, attending social events is another add-on and let’s not forget the ardent need to have a contingency/emergency fund. Most likely, the only income during this time would be the interest income or returns generated on investments made in past. The accumulated corpus and the income generated by it might not be enough to meet all these expenses. Hence, planning for a life post-retirement becomes equally important as the focus during this phase would be on investing in avenues that generate regular income.
Even if one is certain that the category of expenses is unlikely to change, the quantum will. Inflation is one factor that will not remain constant and is likely to erode the purchasing power. The traditional notion about post-retirement asset allocation is to have zero allocation to equities and shifting one’s allocation to pure debt portfolios or hold cash. Assuming an investor retires at the age of 60 years and like expectancy is 80 years; would this strategy help survive the remaining 20 years? Would it generate returns that would beat inflation at the same time help meet the expenses as well? It might not be so. An investor should select asset allocation in such a way that it helps one to be financially self-sufficient in the remaining non-working days. Additionally, during the accumulation phase, it is easier to meet liabilities as one is earning and there is a constant inflow of income. When it comes to post-retirement days, there is a need to create an alternative source of regular income which could be channelized to achieve goals which are dreamt about. This is where allocation to equity as an asset class becomes critical. Equities not only generate a better inflation adjusted returns but also provide easy liquidity. In past 35 years, BSE S&P Sensex has given compounded annualised returns of anywhere about 15% per annum. Any investor would like to have ease of transaction while making and liquidating investments. Equity is one such avenue that provides hassle free way of investing. Besides these, equity scores over other asset avenues in terms of generating superior returns and tax benefits too.
While exposure to equity is advisable, the degree of which it should form a part of one’s portfolio would depend on the risk appetite of an individual. Further, the exposure to equity post-retirement should ideally be much lower than what one would have had when the person is younger (i.e. during ones working life). The post-retirement plan should be sketched keeping in mind the timing of cash flow requirements, based on which the equity allocation can be altered. Post-retirement the main concern is not about the number of years a person lives but living those years without the worry of running out of cash.
For a financially secured and independent future, lay down the goals today and outline a plan as to how to achieve the same. Remember, money invested today would warrant the comforts of tomorrow. So start planning your retirement early and invest wisely.
Mutual Fund Investments are subject to market risks, read all Scheme related documents carefully.
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Updated Date: Mar 29, 2017 18:44:17 IST