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

Mint Asia ST - - Money - BSY UNITA A BRAHAM

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.


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