So many personal finance analysts talk about creating at least a ₹5 crores retirement corpus not realizing that it may not be within everyone’s income limits to accumulate such a massive corpus amount. In light of how much you have been able to garner through regular savings and investments by the time you have retired, you must now focus on how to make your retirement corpus last. One way is that you pay attention to your spending behaviour similar to how you had focused on accumulation.
Now assuming that you have managed to build ₹1-1.5 crores, the first step is to ensure that the money stays and grows to allow you to survive on it in the post-retirement phase. To date, you have been quite focused on how to save. Now you must know how much to spend every month to prevent penury during the last phase of your life. The following steps can help you work on your post-retirement finances.
Check your corpus
Your corpus may be much smaller than what you had planned. Fret not as you can still optimise it for a comfortable living. This is because you can still invest and grow a part of your corpus to ensure persistent growth. First, know how much money you would need in the next year and then list investment opportunities where you can park the remaining funds. Not all investments must be drastic; you must include some basic saving and investment measures to ensure growth at considerably lower risk.
If you had planned for only 10-15 years post-retirement, it would do a lot of good to stay invested in the coming decade so as to fill in the gaps for years ahead that you had missed on planning out. Remember that inflation will reduce the value of your money, which means that you must always strive to grow your money at a rate beyond the inflation rate. This includes setting aside enough to pay higher health insurance premiums too as their prices are impacted by the insured’s age and inflation.
Decide your investments
Do not break away your corpus to pay your expenses. Rather work on it to reinvest it in a way that you get access to a regular income to pay off your monthly expenses while relegating the rest to the emergency fund.
First, decide how much money you would need in the short and long run. Then, decide if you are willing to take risks and to what extent. Now that you are aware of how much you need now and how much you want to set aside for the future, you can start with simple investment measures like small savings schemes, bank fixed deposits, secured corporate bonds, debt funds and then equities. Shift the money that you would need immediately to bank deposits. This will serve as your contingency fund.
For the money that you would not need for the next two to three years, shift it to debt funds. If you are investing for not more than five years, secured bonds will help you earn good returns. If you are willing to take risks and invest in bits, large-cap equity funds and dividend yield funds will help your money grow. This is because the former is more stable even in dire market situations while the latter continues to yield continued returns owing to investments in companies offering regular dividends to their shareholders.
Explaining the proportion in which you may reinvest your corpus, Dev Ashish, Founder, Stable Investor says, “While each retiree’s needs and circumstances are unique, generally, a bucket strategy can be considered. While each retiree’s needs and circumstances are unique, generally, a bucket strategy can be considered. So, while Bucket 1 is for managing regular expenses and income requirements, the second bucket is for the growth of the corpus and to ensure its longevity is extended with inflation-beating returns."
“Suppose a retiree has a ₹1.5 Cr retirement corpus and needs about ₹5 lakh in annual income. So, in this case, he can keep at least 7-10 years’ worth of expenses (approx. ₹35-50 lakh) in the first bucket. Use a combination of bank FDs, ultra-short and low-duration debt funds. Allocation between these can be decided based on their comfort with either instrument. One can have periodic FDs maturing every month/quarter (FD Ladders)," he added.
“Additionally, SWPs from debt funds can be set up for remaining requirements to simulate a pension-type income stream. This bucket will also act as your ongoing emergency fund if you don’t already have it separately. The main purpose of this bucket is to help you get a worry-free constant income for several years into retirement, with some liquidity to handle small emergencies. The rest of the money, i.e., about ₹1 Cr goes to the 2nd bucket which would be in a balanced mix of equity and debt. Depending on the retiree’s risk appetite, having 30-50 per cent in equity and the rest in debt can be considered. For equity, keep large-cap index funds, flexicap funds, aggressive hybrid funds, and balanced advantage (dynamic allocation) funds. For debt, pick from low/short duration debt funds, target maturity funds and also government options like SCSS, PMVVY, etc.,” Dev Ashish mentioned.
It is okay if you are unable to save more due to unforeseen expenses related to old age. In that case, you can think of building up a passive income source. You can either use the earnings from this source to pay for your essential expenses or invest regularly through systematic investment plans (SIPs).
Just because you are retired is no reason for you to squander away your hard-earned money. Keep an eye on your savings and investments. This you can do by keeping an eye on your portfolio and estimating how much money you would need every month or year. Remember that you cannot afford the beg, borrow or steal during the last years of your life.
Enough health coverage
You are more likely to fall ill during your old age, which means that you aim for adequate health coverage. Continue paying your health insurance premiums or choose a health policy that ensures increased coverage at similar premium charges. Make your health insurance a matter of high priority. Also, check if your name is included in the health insurance sought by your children. This will ensure added security in the event of emergencies or treatment subsequent to hospitalization. There are added expenses that your health insurance plan may not cover. This underscores the need to save enough for medical emergencies too.
Focus on risk management
Managing your risks becomes crucial while parking your post-retirement funds in any investment bucket. This is especially true in today’s times of inflation and longevity. Inflation deflates the value of earnings, and longevity requires us to constantly save and invest for the long run. This explains the need to keep some invested in equities, though you must focus on more stable equity funds based on their past performance, portfolio, and portfolio turnover ratio among other factors. Alternatively, you may put your money in index funds, regularly in SIPs, that continue to grow with time along with the market.
Diversification is the key to managing risks in investments. Viral Bhatt, Founder, Money Mantra says, “I suggest reviewing and rebalancing your asset allocation on at least an annual basis to ensure it is ‘appropriate for your risk tolerance and time horizon’. This means selling assets that have outperformed and buying ones that have underperformed to bring your asset allocation back to the target proportions.”
Managing your taxes
Do you know how much you would have to shell out on taxes calculated on the income or corpus accumulated? Beyond inflation, you will lose a lot of money on taxes if you do not pay attention. Check how much taxes you must pay on earnings from capital gains, pension income, interest on deposits, etc. Hire a tax planning advisor or chalk out a strategy on how you can save on taxes while continuing to more from your corpus. Know the various sections under the Income Tax Act that allows you to save your money on taxes. For example, paying health insurance premiums allow you tax benefits under Section 80D of the Act.
Regular maintenance and rebalancing of income buckets based on market conditions is important. This will ensure a financially viable future.