Although retirement planning is acknowledged as something important, it often gets ignored, as there are other goals that need urgent attention.
Consequently, the “retirement plan” is often inadequate and is exposed to certain traps that can be avoided with a bit of informed decision-making. This is particularly true when the investing environment is dynamic.
Things that can derail retirement planning
Life expectancy: Superior medical facilities have increased the life expectancy of people. Earlier, post-retirement life was much shorter. Now, one needs to plan for 30 years plus of life after retirement, failing which, financial dependency may increase at a time when one is no longer able to earn.
Inflation: Despite the RBI’s low CPI-based inflation numbers, inflation for senior citizens is much higher, particularly on account of medical expenses. Medical expense inflation averages upwards of 14 per cent p.a. and is likely to remain higher.
Asset allocation: Financial planners allocate almost the entire retirement corpus into fxed income securities and annuities with assured cash inflows. Allocation to equity is negligible owing to its inherent risk. Meanwhile, some financial planners invest almost the entire corpus into equity linked instruments to generate higher returns.
Inadequate Insurance: Insurance is still seen by many as an investment product, resulting in inadequate cover. Health Insurance cover is often ignored, as people rely on coverage provided by their employer. High premiums and exclusions dissuade retirees from going for health insurance.
Joint family system: The in-built support system of the Indian joint family often mitigated the risk of poor retirement planning. The gradual dismantling of this “social security”, particularly when retirees have spent a bulk of their fortune on their children and grandchildren, can often hurt and haunt them.
Tips for retirement planning
Start early: Retirement planning should be a part of financial planning from the very beginning, with specific allocations to instruments designed for building a calculated corpus.
Succession planning: It is advisable to hold one’s assets in one’s own name and use them first for one's own requirements. Make a will that will ensure a smooth transition of remaining assets to the next generation post your death. Do not live poor and die rich.
Balanced asset allocation: While some financial planners completely avoid equity, some are completely moving out of fixed income securities because of poor returns. The trick is to balance between the various asset classes. Just like a balanced diet, a balanced portfolio becomes even more important after retirement.
Adequate health insurance: Ensure that you are adequately covered for medical emergencies, even if it means paying high premiums.
Focus on leading a happy life: Add life to your years. Do all that you couldn’t while you were busy working. Build all of that into your retirement plan.
Are fixed-income instruments relevant in a low-interest regime?
Interest rates in India have been going down for many years. Interest income is also taxable. As such, when adjusted for taxes and inflation, real returns are minimal. However, retirement planning is not just about generating higher returns. It is more about stability and assurance. Fixed Income securities offer the following benefits, which make them an essential component of post-retirement life.
1. Safety of capital: Fixed income securities, particularly government-backed schemes such as the senior citizens savings scheme and PO monthly income scheme, provide safety of capital.
2. Liquidity: Fixed-income securities generally have fixed tenures, but many schemes offer early withdrawal. This can help in meeting unexpected exigencies. Laddering of fixed deposits can yield higher returns without compromising on liquidity.
3. Stable, assured income: Investors are assured of periodic, fixed cash flows with which various expenses can be met.
4. Relatively higher returns: Some of the schemes for senior citizens offer much higher rates. For example, SCSS currently offers 8.2 per cent p.a. Upto Rs. 30 lakh can be invested in SCSS by an individual.
5. Debt MFs: Debt MFs can provide tax-efficient returns. For example, investing in an arbitrage fund instead of a one year FD can increase post tax returns, particularly for senior citizens in the higher tax bracket.
Conclusion
Retirement planning cannot be ignored in today’s world. Financial planners should not invest the entire corpus into one asset class. Fixed Income securities continue to be relevant for retirees and can help them plan their golden years better.
The author is director of Maxiom Health.