Let your savings work in retirement
Post-retirement life is often met with fears of the savings running out. A bit of planning can reconcile these fears
You look forward to living the dream life in retirement and to do all those things that you did not have the time or means to fulfil. But the fear, that you may drain the retirement pool holds you back.
Don’t give up on growth
Conventional wisdom tells you to stay away from taking any risk in your retirement portfolio. You are expected to invest only in safe, income-generating assets. The fear of downside risk, or the risk of losing the money is primary in the retirement years because there is little or no opportunity to make up any loss in the capital. But the flip side to this strategy is that you may be condemning your portfolio to low returns and your retirement to one of uncertainty and unfulfilment.
If you break it down, what you need is the comfort of knowing that your essential needs in retirement will be taken care of through the retirement years and there is adequate income to follow your dreams. The solution to this quandary is to add a dash of growth to your portfolio. Giving up on growth completely may be harming your retirement goals more than you think. Given the lengthy period of retirement—the effects of inflation, failing health and other changes in life will take a toll on the corpus. The higher returns and compounding benefits from growth assets like equity will help protect your retirement corpus from coming under stress.
Here are two ways in which you can build growth into your retirement portfolio, without letting the volatility rock the stability.
Use time to your advantage
One way to bring growth to the portfolio is to use the long term of retirement to your advantage. Divide your retirement period into distinct stages. The idea is to incorporate growth assets, such as equity, in the last tranche of the corpus where the funds are required at least 15 years away from the start of retirement. The higher returns that this block of funds is expected to earn will pull up the overall returns from the portfolio.
As the years in retirement come down, exposure to growth assets should also reduce—thus protecting the retirement from effects of volatility in returns. For example: the first stage, 3-5 years in retirement, can be defined as ‘immediate’. Funds required to meet expenses in this stage should be held in safe and liquid investments. These are apart from the pension, if any, received by the retiree and mandatory annuity linked to retirement products like the National Pension System (NPS). Your income needs are thus protected for the initial stage.
The portion of corpus for the next 10 to 15 years may be held in longer-term debt and hybrid products, where liquidity and income assurance are traded for better returns— without risking the capital. Such a trade-off is possible because this portion of the corpus is not required immediately.
The last tranche of the corpus, for the third bucket, has adequate time to weather any fluctuations in investments. It can therefore take greater exposure to growth investments, like equity, to generate better returns. The padding that the corpus gets from this exposure allows greater freedom of spending in retirement and reduces the risk of draining the corpus. The proportion of the portfolio assigned to each bucket will depend upon the person’s ability to take risks.
Match income to expenses
Another strategy that you can consider for infusing growth in your portfolio is to prioritize expenses and match your incomes to it. The higher, but less-certain income earned from growth assets such as equity should be assigned to less important discretionary expenses like travel or pursuing hobbies.
You can do this because the retirement income is typically drawn from multiple sources. For example: expenses like repayment of loans, cost of housing, insurance, medical and other essential expenses need to be met from a defined and assured income for the entirety of retirement. Such income includes pension received from an employer or a mandatory annuity, income from assured schemes such as the Senior Citizen Savings Scheme and the monthly income schemes. While such guaranteed products may seem to be the perfect profile for retirement income, the drawback is that they are unresponsive to changes in the expense structure of the individual, which can occur in the course of a long retirement period—including the effects of inflation over this period. You can counter this to some extent by adding inflation-protected incomes, such as rental income, to the cashflow mix. The downside to such incomes is that they are not guaranteed, therefore they should be used for expenses that are important but can be cut back if there is fall in this income.
And then there is income from growth assets like equity, which can fluctuate from one period to the next and should therefore be assigned only to discretionary expenses that are expendable if the returns are inadequate during a period. Over time, the higher returns, which investments such as equity have the potential to earn, will give the necessary fillip to your retirement income pool to combat inflation and pad the corpus to make it last longer.
The income mix and the preference for various sources of income will change with each stage in retirement. As the retirement progresses, income will be drawn primarily from fixed and guaranteed sources that require a greater commitment of capital. Adding growth in the early retirement stages protects the corpus from being drawn too early and secures income in old age.