The best way to create a good corpus for retirement is by investing at an early age. However, once you actually retire, it becomes even more important to choose the right instruments to park the accumulated funds.
Quick Tips
If you have partly invested in equities, start a systematic withdrawal plan to meet monthly expenses
If you have a very high exposure in equities, consider index-linked capital protection products
Buy real estate for regular rental income
This is very important because the returns from the corpus would finally decide the kind of lifestyle you can afford.
The most crucial aspects of post-retirement investing depend on the following:
- Size of the accumulated nest egg
- Desired standard of living and expenses
- Life expectancy
- Desire to leave some inheritance for your loved ones
- Real rate of inflation
- Returns from your investments and their tax implications
- Risk-return profile.
Retirement is generally associated with safety. However, given the present levels of high inflation, investing in most fixed income instruments would give you a negative real rate of return. Further, rising inflation might upset retirement calculations quite badly.
For instance, a post office scheme that offers 8 per cent a year would give a negative pre-tax return, since current inflation stands at 8.75 per cent. And after taxation, the real rate of returns would be even lower.
Now, if you wish to use the interest income to fund your retirement expenses, the chances are very high that you will end up dipping into the corpus invested in the post office saving scheme. And that is real bad news because it means that your money is actually depreciating and that too at a rather alarming rate.
In such a scenario, creating a judicious asset allocation mix that includes fixed income instruments for safety and regular cash flows and high return investments like equities and real estate will help matters to a great extent.
Of course, the last two might see some volatility in the short run, but they are expected to deliver superior returns over fixed income investments over the long run.
Another factor to consider is that they should be tax-efficient as possible. Equities, equity funds and debt funds are good ideas because they are either tax-free or concessional tax rates apply to them, as opposed to traditional investments like bank deposits, senior citizen's deposits and post office schemes.
If you have made a part of your pre-retirement investments in equities or equity funds through the systematic investing route, given the current tax structure, you would not have to pay any taxes on their redemption.
However, instead of redeeming all your money from equities and moving immediately to fixed income instruments on retirement, you could start a systematic withdrawal plan that would help meet monthly expenses while the equity portion keeps earning good returns.
In case you have a very high exposure to equities, which is not advisable post-retirement, consider equity or index-linked capital protection structured products. They generally provide you with the safety of capital through deep discounted bonds maturing at a value equal to or greater than capital invested. Invest the balance in options that provide high equity-linked returns.
Real estate is another avenue one could look at. Ideally, one could purchase property that would generate rental incomes. Also, the property value would appreciate in the long term and be a natural hedge against inflation.
Another important issue to consider is getting adequate insurance. While life insurance is not required for a retired person, since the basic premise of life insurance is protection of loss of income, buy medical insurance for yourself and spouse. Look for covers that offers guaranteed renewability at not a very high cost.
The writer is director, Touchstone Wealth Planners.
