If you go by the brochures of life insurance companies’ pension products, retired individuals surf on rough sea and/or enjoy scenic beauty with a martini in their hand and so on. Simply put, they enjoy life (may be a luxurious one) while most others are working hard with their nose to the grindstone. Insurers primarily want to show that retirement can be fun if only you have a pension product.
A post retirement life, free from financial stress, is a desired one. But, subscribing only to pension policies may not be the only solution. Pension policies offer you sustained, regular payments in retirement. But pension products offer low returns on the accumulated corpus, the annuity received is taxable and the corpus itself cannot be touched once the annuity starts. This makes a pension product, a less attractive than it is made out to be. It certainly is not the principal way to ensure sustenance in retirement.
Here, what is needed is a simple planning. If you are nearing retirement, plan step by step -
Analyse your needs
Many assume that they will require more or less the same amount after retirement, which may not always be the case. The amount required could be lesser as many of your financial commitments towards monthly investments, insurance and children would have come to an end. The expenses may be 25-30 per cent lesser than earlier.
However, medical expenses could go up. Hence, medical insurance of a sufficient amount is a must, though the premiums would be comparatively high if you buy at a late age. Typically, a health cover of Rs 5 lakh would be good enough per person. Now, one can also opt for top-up policies with Rs 5 lakh deductible at lower premiums, maximising coverage.
Life insurance isn’t essential as you don’t have dependants.
Estimate the expenses
What could be your monthly expenses post retirement? What would be your annual expenses towards travelling, gifting and so on? Would you need to relocate after retirement? All these questions need an answer and an estimated budget. That will help you understand your monthly and annual requirement.
Sources of income
You also need to identify your sources of investments after retirement. How much would you get on maturity of insurance plans and as retirement benefit from your employer. This will give you an idea of the corpus you will have. Many have pension plans which give sustained annuities or earn a pension. That means, there is one source of assured income. Estimating one’s life is difficult, but 90 years would be a reasonable estimate to plan for.
Allocating resources
This is an important aspect that can make or break you after retirement. Many make one classic mistake of investing their entire corpus in fixed income instruments thinking they cannot afford to take risks when retired and because they would want a sustained income.
This can turn out to be a big mistake as this asset class generally does not beat inflation. Having all investments in it will earn little and will necessitate having a huge corpus. The right way will be to allocate the resources across asset classes for liquidity, sustained returns, capital growth and protection, risk diversification.
Keep some cash in savings deposit for liquidity. The amount need not be huge as it earns only around 4 per cent a year before tax. Balance can be invested in ultra short-term funds or in sweep-in deposits. The latter will be attractive for many as it is as good as having money in savings account.
For sustained returns, go for bank deposits meant for low risk profiles, but offer post-tax returns of 5.5-7 per cent. If you don’t fall in the taxable bracket, the effective return can go up. The other is company deposit meant for a higher risk profile but offers 1-2 per cent over bank deposits. But, consider the rating given to the issue (opt for only AA+ and more).
Debt mutual funds and Fixed Maturity Plans (FMPs) are attractive options, too. Though they may offer similar pre-tax returns, their post-tax returns are higher as these are comparatively tax efficient. Also, debt funds are liquid. There would be exit charges up to a point after which one can get out when one needs. This is invaluable for retirees. This could also act as a contingency kitty.
Other instruments are non-convertible debentures (NCDs), tax-free bonds and so on, in which one could look at the returns, ratings and liquidity and then decide. Tax-free bonds would make sense for those in the higher tax bracket.
Even equity assets should be considered. Equity funds are an ideal way to participate in this asset class as it offers diversification, professional management, liquidity and tax efficiency (there is no capital gains tax if the investment is held on for one year).
Most people steer clear of this asset class in retirement, due to market volatility. Returns are unpredictable in the short-term but have been good over the long term. Just that in retirement, the allocation to this asset class should be well calibrated and one should not over-do it. Having between 30-40% in retirement is the norm. However, one’s specific situation needs to be considered before taking a decision on and appropriate allocation.
Review and course correction
While monitoring the portfolio on a weekly /monthly basis is not advisable, do take a look once in every six months or a year. That is, to follow a defined equity-debt allocation and tweak investments accordingly once or twice a year.
You can actually have a post retirement life as shown in pension products’ brochure if you go through the entire process and allocate resources considering everything right from liquidity to contingency.
The writer is a certified financial planner
