So many people discuss how to save enough for retirement but pay the least attention to their investments post-retirement. Apart, many investors associate old age with a risk-free attitude. This also explains their standard approach toward investing their retirement corpus in debt funds, fixed-income plans, corporate bonds and bank deposits. Not too many of them talk about reinvesting a part of their corpus in equities. This can be attributed either to ignorance regarding the decreasing value of money or the inability of many retired people to gauge how much money they must set aside for their remaining lifespan post-retirement.
Missing out on investment opportunities
Many people fail to preserve their post-retirement corpus owing to a lack of planning. This is because they do not account for the quality of life post-retirement. Most planning is done based on today’s expenses without accounting for the current inflation rate, the possible inflation rate in future and the vulnerability of suffering from age-related diseases.
What suffices today will not be sufficient for tomorrow is a fact that many people miss out on while allocating their money to various investment options or deciding against reinvestment of their earnings. Many underrate the efficiency of equity instruments in the creation of the much-needed corpus that would continue to pay for their expenses in the long run.
Not many retired people invest in equities post-retirement. Not many of them know how much to hold and set aside for equities after retirement. A lot depends on investors’ risk appetite and how they view the volatility in the stock markets. Though there is no thumb rule to demarcate the right proportion toward equities, the ideal way out is to first decide how much part of the corpus you would need in the short run, say for the next five years. You can then push the remaining amount to equities for a prolonged period depending on how much you wish to earn from that corpus.
Deciding equity investments
To start with, check how much money you have on the date of retirement. Keep 30 per cent of the money with yourself. You can move the remaining 70 per cent to various equity mutual fund investments. The first 30 per cent must be then reallocated to debt funds, secured corporate bonds and fixed income deposits. The idea behind cumulating the remaining amount and relegating it to equities is to ensure continued returns from the corpus that beat inflation.
It is important to pay attention to inflation during the post-retirement phase too. The corpus that you withdraw from various instruments to fund your post-retirement life is also subject to inflation, thus, underlining the need to continue earning more on your money. Sans the continued churning of your money, you will be forced to rely on your corpus to pay for your remaining living expenses. If you are not sure if you have enough corpus in end to beat inflation, the best way out is to invest through systematic investment plans (SIPs) in funds that earn good returns and are comparatively less volatile.
Little corpus is not a problem if you are aware of how much returns you expect from your investments. For reasonably sized investments that grow with time, you may opt for large-cap mutual funds that have performed well over the period. If you have a huge corpus, you can easily divide the same into flexicap, mid-cap and small-cap investments. Those who have some extra corpus in hand that they do not plan to use for the next 15-20 years can allocate the same to sectoral funds to benefit from cyclical returns.
Deciding asset allocation
A huge corpus or a small corpus is not a problem. The problem lies in your inability to visualize your financial future and how you view your financial security in the long run. Also, are you willing to take enough risks or be content with some reasonable returns over the period?
The right asset allocation matters. And this is why you must keep the following principles in mind while deciding your next move in investments.
- You are saving for the later part of your life wherein you may not have access to regular income. This calls for the need to be a bit conservative with your savings and investments. To err is to lose, which is why you must exercise caution while deciding your next course of action.
- Take note of the risk-returns factor involved. Too much risk may not translate to more returns. Not what you are getting into. Do not take the unwarranted risk of putting money in investments that you do not understand. Read the fund document carefully before deciding to park your money in any particular fund.
- Avoid non-performing funds as the low returns at the beginning will only eat into your corpus without garnering anything in return.
- Have some money in hand and in your bank account to pay for your emergencies and short-term needs before moving on to equities. Parking money in equities hoping to take them out after a year or two will only cause you to lose money or earn considerably lesser than what you had anticipated.
- If you still have responsibilities or expenses that must be taken care of regularly, do not allocate more than 30 per cent of your corpus to equities.
- Check if the earnings from your investments in the first 15 years are good enough to beat inflation. If you cannot afford to wait for so long, opt for an alternate bucket strategy that could help earn similar returns in a shorter period.
Do not rush with your investments. Take a conservative approach. Remember that this is the money that you are going to invest and earn for the remaining golden years of your life. So, a cautionary approach is much advised.
