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Younger generation today is much willing to take exposure into market-linked products like mutual funds to grow their wealth over time. But, many retired individuals wonder whether they should take that risk too. 

“For a retired person, who does not have a pension or a secondary income like a rent income etc, the need is primarily a regular income which would be growing periodically, considering inflation," said Amit Trivedi, personal finance coach, speaker and author of Riding the Roller Coaster

For example, if your current monthly expenses are 30,000 per month, then exactly 10 years down the line your expenses would be close to 60,000 monthly at 7% inflation rate, if you want to retain the same lifestyle.

Now, consider this, if you have 1 crore corpus, then at 7% interest rate, which is usually provided by FDs and debentures to retirees, for an annual withdrawal of 3.6 lakh, i.e 30,000 monthly, the corpus will last you for 41 years, which is quite significant. However, if expenses continue to increase at 7% inflation rate, then the same would last you for only 15 to 20 years.

What happens here, Trivedi says, is because you are withdrawing from the corpus, it grows up to a point and then starts declining whereas expenses continue to grow and then you run out of corpus.

So, there are only two options here either to simplify your lifestyle further or to look for means to grow your money.

In order to maintain a corpus that lasts you lifelong but does not require you to compromise on your lifestyle, Trivedi says, you have to take notice of 2 crucial factors. One the rate of inflation versus the rate of interest. Always make sure that the rate of interest is 1 to 2% higher than the rate of inflation. 

The second factor is how much percentage you are withdrawing from the corpus as annual expenses, in that case, 3.6% is a good number, at least in the initial years.

Should retired individual invest in Mutual Funds?

There is no relation to a person’s age and whether one needs mutual funds or not. In order to understand that, Trivedi adds saying, we must keep in mind that:

1. A mutual fund is not an investment by itself, but an investment management services offered by the asset management company (AMC). Instead of an investor managing one’s investment, the AMC, a professionally managed firm does the job on behalf of a large number of investors.

2. There are different types of schemes within mutual funds to suit various needs of investors. The needs of the investors could be defined in different ways, e.g. in terms of (i) a combination of safety, liquidity, and returns; or (ii) in terms of investment horizon, etc.

So what portfolio strategy should a retired individual follow?

A retired person, who has no pension or any other source of income, should look for a strategy to generate income for another 25 to 30 years at least.

So that way, the entire corpus should be put in three buckets. The first 3 to five years of expenses should be put in liquid assets or ultra-short term bonds. The most important criteria here is the assets should be extremely low risk.

So, regular monthly income withdrawal should happen from the liquid fund, the next 3 to 4 years expenses should be kept in debt funds and the rest should be in growth-linked funds.

Now periodically, one should review their growth portfolio, maybe 2 to 3 years, and whatever the appreciation amount would be, it should be put in the liquid bucket. This way the liquid fund, meant for regular withdrawals, will last for a longer period of time and if it somehow runs out of the money the debt fund is always there, Trivedi asserts. 

Adding to this, Sunil Subramanian, Managing Director at Sundaram Asset Management Company Limited, said to create inflation beating returns they should look to invest 30 to 40% of their disposable income in Hybrid category and balance equally slit between Flexicap and Short Term Debt MFs. 

The strategy is to balance risk and reward in equal proportions.


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