Not everyone is entitled to an employer-sponsored pension
Longevity risk, or the risk of outliving the available corpus, is the biggest stress for senior citizens
Ensuring adequate income throughout the retirement period is the principal financial goal for senior citizens. Not everyone is entitled to an employer-sponsored pension and most people have to depend upon the corpus that has been created in the working years to generate the income required. Longevity risk, or the risk of outliving the available corpus, is the biggest stress for senior citizens. Here are five things you can do to make the most of the corpus that is available to you in your retirement years.
You need a strategy in place to earn an adequate income from diversified sources and protect the corpus from losing real value on account of inflation.
First, have an income stream that is assured for essential living expenses. This can be constituted by pension, if any, and guaranteed and assured income products such as Senior Citizens Savings Scheme, bank deposits and bonds. Defer buying an annuity as far as possible to maximize your payout in the later stages of retirement when you want assurance and simplicity from investment products. Dividends from equity investments and rental income also constitute periodic income earned on investments with the added advantage of being inflation-protected, although there is assurance on the income, especially dividends.
Investing for income comes with the risk of missing out on better returns available in the future once the corpus has been tied up. Then there are the reinvestment risks associated with debt instruments. One way to mitigate these risks is to build a staggered or laddered portfolio of diversified debt products of different tenors. This includes short-term bank deposits, ultra-short term and low duration funds for the short-term horizon; Senior Citizen Savings Scheme, short duration and corporate bond funds, bonds and debentures with tenors up to five years, bank deposits, and other deposits with up to five years tenor for the medium term; and bonds, deposits with longer than five-year tenor and long-term debt funds for the long-term tranche. The short-term products will mature early and free up capital for you to invest at higher rates if interest goes up. If interest rates fall and you have to reinvest at a lower rate, the impact on your portfolio is lower since only a small portion gets reinvested at the lower rate.
Conventional wisdom tells you to stay away from taking any risk in your retirement portfolio and invest only in safe assets. However, given that retirement years can be lengthy, the effect of inflation, failing health and other changes in life will take a toll on the corpus. In this scenario, the higher returns and compounding benefits from growth assets like equity will help protect your corpus.
It would be a good idea to incorporate growth assets such as equity for the last tranche of the corpus where the funds are required at least 15 years from the start of retirement. The higher returns that this block of funds is expected to earn will pull up the overall returns, without risking the availability of income to meet expenses in the initial years of retirement. As the years in retirement come down, the exposure to growth assets should also reduce, thus protecting the retirement from the effects of volatility in returns.
A second career
If you have doubts about whether the corpus you have created will see you through retirement, then it is best to take action in the initial years of retirement when you still have the skill and experience to consider a second career. The income will reduce the stress on the retirement corpus. The longer you are able to bring in some additional income the better will be the protection from the risk of running out of money.
An emergency fund in retirement is more to fall back on in case of a large and unexpected expense rather than loss of income. Typically, this will be related to health issues that are not covered by insurance but are large.
“A health insurance policy with a sum insured of ₹5 lakh is a good starting point, but it is important to remember that a health policy may not cover the entire hospital bill. Also, some ailments may be permanently excluded from the scope of the cover," said Deepali Sen, certified financial planner and founder of Srujan Financial Advisers LLP. “It is therefore recommended that an emergency corpus with at least six months of expenses be kept aside in liquid and ultra short-term funds," she added.
Other expenses that may not be budgeted, such as maintenance and gifting can also come from the emergency fund.
Life insurance may be relevant if pension and other income available to the household may significantly reduce on the death of the primary pensioner and investment income is inadequate.
Other insurance that may be relevant for senior citizens, and which can be procured at low cost include insurance to protect assets such as the home and its contents and auto insurance.
Keep debt at bay
If there are debt repayments to be serviced, a larger portion of the retirement corpus has to be employed to earn the fixed and guaranteed income. The rate of return on such investments is, typically, low. If you are in such a situation, you will end up underutilizing your corpus, which will impact financial security through the retirement period.
Existing debt obligations may also make it difficult to access debt in an emergency. There is a risk of the amount of pension ceasing or reducing on the death of the primary pensioner, making it difficult to service the debt. “A home loan though is an exception to the no-debt in retirement rule, given the tax benefits. However, even in the case of home loan, you should actively consider bringing down your liability beyond the point it stops becoming tax effective. For instance, if your interest outgo is ₹2 lakh in a self-occupied property, the entire amount is available for income tax deduction, but if the interest outgo is more than ₹2 lakh, you should consider reducing the outstanding liability," said Nikhil Kothari, chief financial planner at Etica Wealth Advisors, a Mumbai-based financial planning firm.
A budget that takes available income into consideration and the discipline to live within this budget are essential tools to make retirement life a success since the possibility of replenishing the retirement corpus is limited. There are different phases in the retirement years and it is important to fine-tune the retirement portfolio to the needs and preferences at each stage. Make this rebalancing an essential part of managing the retirement portfolio.