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Safe returns after retirement is a myth
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Retired or retiring people, in general, are advised to realign their asset allocation to `safer' avenues. Many arguments are advanced in favour of this shift.
Emotional: Need to protect one's life-long savings; Pseudo-logical ones: Cannot afford to lose even a single paisa now as earnings are reduced while expenses only rise; And even medical reasons: Cannot afford to have another stress-point in old age.
However, the question remains whether such safer investments actually keep the money safe.
The biggest threat to the retirement corpus, painstakingly built up over the years, is inflation and income tax.
Inflation eats into the purchasing power of this corpus. Hence, there is a need to ensure that bulk part of the money earns at least as much as inflation to retain its value. Taxation ensures that, if you are in say 30% bracket, a seemingly great 9.5% interest on a bank FD gives you post-tax returns of only 6.56%! Thus, if the average yearly inflation is 8%, then though the money in your hands on maturity of a Rs 10 lakh FD will be Rs 13.74 lakh and Rs 18.88 lakh, respectively, after 5 and 10 years, effectively it will have a purchasing power of only Rs 9.30 lakh and Rs 8.65 lakh compared to today . Though you may feel your corpus has almost doubled in 10 years, actually it can buy lesser number of things than now.
Thus, instead of increasing in value, it has actually lost its effective value over time.
The second threat to the corpus is the fluctuating interest rates. Safety net instruments are primarily fixed interest rates which have defined maturities and need to be re-invested on maturity .
Since interest rates too have their own cycle, it is not necessary that interest rates will be high when your matured money has to be reinvested.
The third issue is the very long investment periods for retired people. Most retire at 60. Taking a life-expectancy of 85, almost a quarter of a century has to be lived consuming the retirement corpus in which standard of living should not go down. While short-term requirements should be invested in safer debt instruments, some risk would have to be taken preferably in equity-related instruments for long-term requirements if at least the purchasing power of the corpus has to be maintained.
Hence, resorting to the so called 100% safe investments of fixed income instruments actually erodes the corpus as also exposes one to reinvestment risks. If that be so, what should a retired or retiring person invest in? Here are some suggestions: h Instead of looking for investment solutions at the word go, look for meeting the balance requirements instead, which would guide the type of investments to make.
Look at the financial liabilities still pending and a pragmatic assessment of monthly expenses, including medical needs, over the rest of the lifetime.
h Short-term needs for the next few years should go into fixed return investments like debt mutual funds, bank/company FDs etc.
h Long-term requirements could go into equity-related products. Prefer equity mutual funds over direct investment in stocks unless you are confident of your stock picking prowess.
h Equity instruments should progressively be switched to debt products with one year's requirement at a time so that your next few years' financial requirements remain in fixed income avenues at all times.
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