If you thought that planning for retirement and being disciplined about managing money is over once you retire and when you have finally accumulated the required corpus, then you need to pause and reset your expectations. The rules remain the same even after you retire; they are just recast in a different mould. In fact, the cost of ignoring the rules or making mistakes is higher in retirement since there is little recourse available to make up for wrong decisions. Here are a few things you should keep in mind to ensure your retirement is smooth.
Don’t be too safe
In an effort to protect the retirement corpus, you may be putting your retirement at risk. Typically, after retirement, one invests in options that are considered safe and will not put the principal invested at risk and give assured returns. But risk is more than just default and volatility.
While the principal may be safe, the real value of the corpus may be eroding. A long retirement period may mean that the impact of inflation will eat away into the real value of the corpus and may expose you to the risk of running out of money. Make sure the portfolio has an appropriate dose of equity so that the returns take care of inflation and provide the moat that keeps your corpus from being drawn down quickly.
Locking the corpus into an annuity early on after retirement for a guaranteed income is another action that may be safe but not in your best interest. The lower returns in a product like an annuity will be compounded by the longer term for which income has to be provided and this will bring down the periodic income.
Don’t be adventurous
Letting markets dictate your investment decisions in retirement may mean too much equity and attendant risks at a stage when you cannot afford to do so. A large corpus available to invest and the promise of high returns whether from equity investments or other products may tempt a larger-than-prudent investment at this stage. Markets may hit a bad patch and take a couple of years to recover. Or, the high-yielding investment may disappear like many of the ponzi schemes retirees have fallen prey to in the past.
A well-thought out asset allocation that keeps in mind the available corpus, need for income and liquidity is what works best. Naveen Julian Rego, registered investment advisor and certified financial planner, looks at the adequacy of the corpus as a factor to determine the extent of growth assets that can be included in the portfolio. “If the corpus accumulated is not large relative to the income needs, then we are cautious about taking equity exposure in a retirement portfolio. If the corpus is large, then we may consider equity exposure based on a suitable asset allocation after due evaluation of the ability to take risks," he said.
“We divide the corpus into three buckets in such a way that the third bucket will be accessed only 15-20 years from the start of the retirement. It is this bucket that we take equity exposure in since there is adequate time to ride out any volatility," said Shilpa Wagh, a Sebi-registered investment adviser.
Let asset allocation drive investment choices. It takes away the impact of recent experiences, good or bad, from investment decisions. Build a diversified mix of stocks, bonds, short-term debt investments, in accordance to your income needs and your comfort with market volatility.
Have a cushion
Your retirement income may need protection from bad markets and against common mis-steps that can be avoided with a little planning. One way is to create a buffer that will protect the income from periods of low interest rates and bad markets by building a cash cushion that is adequate to meet expenses in the immediate three to five years—that will prevent the need to draw down on investments when their values have fallen.
When markets are good, use the gains from rebalancing the portfolio to refill the cash bucket. The income required for the immediate future is protected from volatility by locking into products that combine safety and good returns such as government-sponsored fixed-income products.
The next step is to look at tax efficiency and debt funds are a good option here, said Rego. Strategize to minimize taxes as far as possible. Most of the income earned such as pensions, annuities and interest income is, typically, taxable. Money held in debt funds earmarked for near-term use can be withdrawn using systematic withdrawal plans (SWPs) to reap the benefit of indexation on long-term capital gains. It requires a little planning to make sure that the investments are held for more than 36 months before withdrawal.
Prepare for emergency
Emergency fund has as much relevance in retirement as it does in the earlier phases of life, though the type of emergency may be different in the latter years of your life.
When you are earning, the emergency fund is a cushion to fall back on if the income were to go down. In retirement, it is to protect the income from a large, unexpected expense. “There is always some expense that is not accounted for. Or they like to give gifts and presents. I ensure they keep a fund aside for those," said Rego.
Also, healthcare is a big expense that can come up in retirement. Even though health insurance should be an integral part of retirement planning, there may be deductibles or uncovered expenses and regular income may not be enough to fund those.
Retirement is the phase when many of the assumptions made at the start may change over time. Flexibility and liquidity should be important features of the investments you consider so that the portfolio can be aligned to your changing needs.