The most thought and searched after topic for people approaching their retirement age is firstly how one would keep himself / herself busy post retirement and secondly, how would they financially sponsor themselves. The motive of this blog is rather to answer the second part – being financially independent post retirement and making your life savings to do the work for which they were accumulated. And since we are talking about your full life’s saving, special care needs to be taken while using them to finance your day to day requirements. A slight mistake can reduce your savings, provide you less than optimum monthly income or expose your finances to unforeseen risks. At Banyan Financial Advisors, we specialise in post retirement planning and can help you to use your savings to provide an optimum income with minimal risks.
Lifestyling as a concept is not very largely known. It is a mechanism of gradually reducing the risk on your portfolio as you approach towards the end of your targeted saving period. It can be used for all saving objectives such as child education, marriage, retirement etc. In Lifestyling, you gradually sell your high risk portfolio and invest into low risk portfolio. For example, if you have been investing for over 20 years to finance your post retirement life and are about to retire in next 5 years, you would not want that due to unforeseen market situations, your savings gets negatively affected due to excessive risk you had on your portfolio. One example of excessive risk is – investing between 70-100% in a single asset class such as Equity. Hence when you are around 3-5 years away from your retirement, you should gradually sell your equity portion of your portfolio and switch into less risky debt portfolio. In the current credit crises wave, lot of people approaching retirement got trapped and found their life savings reduced to 30-50% at the time of retirement – a situation which you would not want to happen with you. However, care should be taken while performing Lifestyling for your portfolio as too early lifestyling may prevent your portfolio to grow.
You may have already performed this part of your planning. A clear list of expected monthly expenses needs to be arrived at by you in order to know how much funds you may need as a minimum to finance your living. You may think that this should have been a starting point of your investment objective years ago – correct! However, the objective of this exercise post retirement is to arrive at the investment mix which should alteast provide you the minimum required funds that would allow you to maintain your standard of living. It is important that you add upon the inflation factor which would increase your monthly expenses over a period of time.
Other sources of Income
If you may among the lucky ones, you may be receiving a monthly pension income post retirement. It is important to understand how much would this pension amount be so that you can arrive at the gap between your expenses and the pension income which would need to be financed by your investments. You may also get lumpsom funds from your Provident Fund, Gratuity, etc. Also, your PPF account may now be ripe enough to allow withdrawal. Combine all these totals to arrive at monthly recurring income plus a lumpsom retirement funds available for investment.
Now comes the real investment part. The above two paragraphs would give you an indication of how much minimum income you need per month. Once you have retired and have a pot of funds which you would want to use to finance your retirement life and the first thing which you must make sure is that they are not subject to excessive investment risk as you would no longer have a steady source of funds to replenish your retirement kitty. In order to reduce the risk as well as optimise the returns, the available investment options with the investor are :
1. Bank Fixed Deposits : Most of the people retiring have an age of 60 years and are classified as senior citizens. Senior citizens are offered an additional interest rates by the banks for investing in Fixed deposits. In the current era of high interest rates, you may open a fixed deposit for 10 years duration with monthly or quarterly interest payout. A ten year duration would ensure that you have locked in with the bank for 10 years and have an assured cash flow. Approximately 70-100% of the lumpsom retirement funds can be invested in Bank Fixed Deposits. You can refer to our blog note on fixed deposit on tips to maximise your returns on fixed deposit Fixed Deposits – How to Benefit the Most Out of them. For example, in the current interest rate climate, a lumpsom of Rs. 10,00,000 FD can provide around Rs. 8000 per month of interest income. Make sure that you do a research around in the available list of banks to understand which bank is paying the best interest rates. An excellent website is http://www.ratekhoj.com/ which provides a comparative interest rates provided by various banks over different maturity periods.
2. Corporate Deposits – offer attractive interest rates which is generally higher than the bank deposits. Corporate Deposits (CDs) of reputed companies are good alternatives of bank deposits. Generally CDs provide interest payouts on a half yearly or yearly basis. Make sure that that no more than 10-20% of your lumpsom are invested in CDs. Further more, CDs should be spread across different companies to diversify the credit risk of the respective companies. Remember, you can not bear the shock of excessive loss due to default of a company – hence follow the golden rule of not keeping all eggs in one basket.
3. Annuity plans from Insurance Companies : Almost all life insurance companies provide some or other annuity products. Annuity products take a lumpsome amount from the investor and provides a monthly investment income post retirement. On the death of the investor either the lumpsom is provided to the nominee or the annuity is provided to the spouse till death. The terms vary from one annuity provider to another and hence a goodish bit of research is required to choose a right annuity product. I am not a great fan of going with Annuity products in times where interest rates are high. A better result may be obtained by investing in a Fixed Deposits as mentioned in point 1 & 2 above. However, it is worth a comparison to identify if the Annuity plans are providing a better monthly income.
4. Investing into Balanced Mutual Fund SIPs – This shall be your last priority as you may not be able to bear the volatility of the equity markets. However, if the combined income from all your sources of post retirement income plus the investment income arriving from Option 1 & 2 exceed your expenses, you may want to invest a portion of the surplus funds into mutual funds which invest around 10-65% of their corpus into Equity markets. For example, if you would get post retirement pension as Rs. 5000. Your interest income from Bank fixed deposits is Rs. 20,000. The total income would be Rs. 25,000. Lets say if your total monthly expenses are Rs. 15,000 then you would be having a surplus funds of Rs. 10,000 every month. You can invest around Rs. 2,000 – 3000 per month in a mutual fund via Systematic Investment Plan (SIPs). Remaining amounts can be temporarily parked in the form of low risk products such as PPF or bank recurring deposits. The reason behind this investment approach is explained in the next paragraph.
Out living your savings
You may question as to why should you invest in Equity / Balanced mutual funds post retirement. The biggest reason behind this is to prevent you from outliving your savings. There are many people who use their entire retirement funds and have no money left after 5-10 years post retirement. The reason being inflation eats into their savings or they over expend their savings. Other reason being a person living more than the expected life. While this is a blessing, it is important to think about catering to such a situation. Investing into Mutual Funds on a monthly basis would create long term capital and help you out from such a situation. And since you would be investing into the mutual funds out of your interest income and not from your initial retirement fund, it would not dent your retirement funds should the equity markets collapse or give negative returns in short run.
You can contact the author of this article – Banyan Financial Advisors via www.banyanfa.com.