Retirement brings about a major transformation in an individual’s work and social life. During our work life, most of us are focused on financial goals like buying a house or a car, funding children’s education and their marriage etc. In the quest for increasing our earning capacities to meet these goals, retirement planning often takes a backseat. However, as we approach retirement, we are faced with the harsh reality of having to maintain the same standard of living without a predictable regular income and invest retirement corpus failing which, cut down on our expenses. In this article, we will look at the various financial risks faced by a retiree or a pre-retiree, ways of restructuring his existing portfolio to factor in the new change and dealing with the accompanying risks as also the various avenues available for investing retirement money
|Retirement worries/Risks||Investment Strategy|
|Inflation – One of the greatest fears of a retiree is facing the impact of a rising inflation with their limited resources.||Though stability of income is of prime importance at this stage and majority of the clients’ assets should be in fixed income, an allocation to equity is essential to beat inflation.|
|Volatile stock markets – Many clients would have taken significant exposure to the equity/stock markets during their working years. Losses on these investments could be very traumatic after retirement.||Investors should cut down their equity portfolio to a reasonable level to lower the risk and be content with lower returns.|
|Expenses on health – A major worry is providing for rising medical expenses as age advances. Most of us have a medical insurance benefit provided by the employer, hence do not even consider buying one from elsewhere. This benefit ceases on retirement, especially in the private sector.||Adequate health insurance is essential at this stage. If one doesn’t have a health insurance and is below 60 years of age (which is the upper age limit for taking a mediclaim policy with most of the companies), it is advisable to take one which provides cover for the longest period.|
|Running out of retirement savings during one’s lifetime-This is a very common worry, considering the trend of people retiring younger and living longer resulting in increased durations of retirement phase.||It is important that retirees plan and invest their nest egg efficiently with substantial portions in tax efficient investments and utilizing all available benefits for senior citizens like extra returns on fixed deposits etc. The idea is to try and manage the regular expenses only from the interest and dividend earnings, preserving the principal for emergencies.|
HOW TO INVEST RETIREMENT MONEY
Apart from the existing investment portfolio, at the time of retirement one usually gets a lump sum from EPF, Gratuity, commuted part of the pension, leave encashment etc. The biggest challenge is to invest this sum in areas which are both safe and also provide good returns. Let us look at some such avenues.
Senior Citizens Savings Scheme – SCSS
This is a government scheme especially for retirees. The maximum investment per head is Rs. 15 Lakh for a period of 5 years, with an interest rate of 9 % pa payable quarterly.
One of the most conventional way to invest retirement money, most bank fixed deposits offer a special higher rate of interest for senior citizens (above 60 years of age) which is usually around 0.5 % more than that on a normal deposit. One can opt for the cumulative, annual, half yearly, quarterly or monthly interest options depending on his or her liquidity requirements.
Post office monthly income schemes –POMIS
Another way to use retirement corpus is by investing in a govt. scheme offered by post offices in India .It has a limit of Rs 4.5 Lakhs for a single a/c and 9 Lakhs for a joint a/c. The interest rate is 8 % pa, with a 5 % bonus on maturity after 6 years. The effective annual yield is 8.9 %.
Annuities are offered by life Insurance companies. It is a regular monthly payout from your retirement corpus which is paid to the annuitant. This can be an important source of a regular income stream on retirement. One can choose from different annuity payout options-
Lifetime annuity without return of purchase price-Annuity ceases on death.
Lifetime annuity with return of purchase price-The purchase price of the annuity is paid to nominee on death of annuitant.
Lifetime annuity guaranteed for a certain number of years.
Joint life or last survivor annuity – The spouse continues to receive the annuity even after death of the annuitant.
Other Government schemes
There are several other schemes which can be considered for their safety and decent returns to invest retirement money, if liquidity is not an issue. The principal and interest is paid on maturity.
RBI Relief Bonds – Invest for 5 years at 8.5 % pa tax free interest.
National Savings Certificate- lnvest for 5 years at 8.4 % pa and for 10 years at 8.7 % pa
Though a risky investment option, every retirement portfolio should have some allocation to equity as it is one of the very few areas which over time can give you a decent positive real rate of return after factoring in the inflation. Direct equity stocks and large one time investments in equity mutual funds are best avoided. The systematic investment route for investing in equity MFs is advised.
This isn’t exactly an investment option, but can be a boon for people who unfortunately haven’t been able to build the corpus to lead a comfortable retired life. Such people have an option of mortgaging their house and earning a monthly income from it for life. They can continue staying in their house as long as they live after which the mortgagee gets possession of the property. Most of the public sector banks and a few Non Banking Finance Companies in India offer this scheme.
Conclusion for Retirement Corpus
In summary, a systematic approach towards deploying retirement corpus based on the principles enunciated above will a go a long way in lending stability and security during the final leg of our life’s journey and right way to invest retirement money would help in mitigating the risk of either running out of money or being unable to deal with old age related contingencies