Managing Portfolio In Retirement Years:
Retirement period is considered to be a new beginning for an individual. It is the time to unwind and pursue hobbies, which you were not able to pursue due to lack of time during your working life. Whether to plan vacation to unexplored locations or pursue the hobbies of gardening or photography, what is required to make your retired life a pleasurable experience is proper asset allocation of your retirement fund.
Your post retirement period on one hand is the most relaxing period of life after putting long years of working life and also on other hand it's a period when fresh income will stop and you will have to
Manage with whatever retirement corpus you have generated during your working life. With higher life expectancy, increasing cost of medical treatment and double digit inflation, life has become more challenging for a retired individual.
As we already now, the interest rates have been on a downward trend for few years now. The government would want to bring the interest rates in line with the market rates on government sponsored saving schemes like PPF, Postal Schemes etc, with some premium for retail investors. The post tax return from the traditional investment avenue of bank fixed deposits is also very low. Inflation, coupled with rising medical costs and lower interest rates leaves little option to retired individuals in terms of investment instruments, which can generate decent inflation beating, post-tax returns.
Consider Inflation Monster:
During working life, the inflation effect more or less get nullified as your income grows in line with the inflation rate but during retirement, inflation eats into your savings as you no longer have a growing income. So it becomes essential that your portfolio generates inflation beating return.
Lets consider that your monthly expense when you retire at the age of 60 is 25,000 per month. With inflation of 8% this will grow to 1.16 lakhs per month by the time you turn 80 years of age. So obviously your retirement kitty must earn return over and above 8% just to keep you floated and in today's environment there is perhaps no fixed income debt product, which can give you above 8% post tax return.
Add Equity Flavour to Your Portfolio:
We have always emphasized that long term equity is the only financial asset which can give you the most tax efficient inflation beating return. Although it comes with its own share of volatility but you can't escape from having equity flavour in your portfolio if you want your retirement kitty to provide for your post retirement years. It must be noted that the post retirement years can easily extend to 15-20 years.
We have also emphasized on the importance of having long term investment horizon when it comes to equity investment as duration increases, volatility comes down substantially. Thus the investment horizon is long enough for a bit of equity exposure. The quantum of equity exposure depends on the requirement and the amount of retirement kitty already available.
Importance of Asset Allocation:
There is no doubt that debt should be the major part of the your portfolio. The equity component should be only that kitty which you are unlikely to consume in the next 7-10 years. Normally, a component of 10-25% would suffice if you have a decent retirement kitty. Please note that the equity component must strictly be need driven.
The important thing to remember is to maintain proper asset allocation between equity, debt and physical assets (say real estate) during retirement years. Taking exposure to equity through diversified equity funds or balance funds are advisable rather than going for buying equity shares directly from the market. Having ideal allocation between these three asset classes can protect you from potential downside of equity and generate inflation beating return. Further, the asset allocation would slowly reduce on the equity component as you age and should ideally be nil by the time you reach say 70 years.
Use Transaction Options Effectively:
Mutual Funds offer two different kinds of options to investors. Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP). During early years of your retirement you can let money grow with your equity component and then gradually either start withdrawing profit component as annuity or start transferring to liquid funds to protect your portfolio from potential equity downside.
Doing STP/SIP in Retirement Years:
This may sound little strange on face of it but remember that on retirement an individual gets large
sum of money as retirement funds. This entire fund is not going to be used at one go. After keeping aside funds equivalent to meet the first 3 or 5 years of expenses and after investing pre decided component in debt, rest of the funds can be put in liquid/short term category of funds and STP can be done to diversified large cap funds. Remember that STP works on the same principles of SIP and generates similar benefit of rupee cost averaging to investors.
Conclusion:
The awareness on the need for retirement planning has increased in recent years. There are large number of individuals who want to retire early, even as early as late 40s. In such a case, the traditional age mark of 60 years no longer holds true for many of us. With sound planning, proper asset allocation and a bit of aggression can go a long way in making sure that your peaceful retirement years are sustained for long.
