When my neighbour, Vijayalakshmi Krishna’s son visited her a few weeks ago, he told her something which brought her equal parts respite and turmoil.
He told her not to scrimp and save her and her husband’s retirement corpus for either her son or her grandchildren because the Rs 25 lakh she had in her bank account would not count for much in ten years.
Vijayalakshmi was crestfallen that she would not be able to leave anything for her grandchildren. But that is the nature of money sitting in a fixed deposit. As a child, Vijayalakshmi believed that Rs 25 lakh was a King’s ransom, and the interest she could accrue on it, nearly 13 per cent then, was a bounty. Compare that to today’s interest on bank deposits which has shrunk to single digits. Not to mention all other risk factors, black swan events and more, a lakh of rupees in a fixed deposit today is literally nothing tomorrow.
One of the biggest challenges that retirees face is to stretch their savings till the last day of their life. A person who retires at 60, must be able to make his savings last for the next 25 to 30 years, because life expectancy has increased, and women tend to live longer that men.
Therefore, the thought of retirement can bring about a mix of emotions – joy, relief (no more 9-to-5), or anxiety (who will look after me when I’m old, will my money last me till the end, will I be able to manage independently?)
A good retirement plan must put money into your hands even as the income from your salary stops. It should also balance the growth of your portfolio with your individual risk appetite and prepare you to navigate retirement confidently and comfortably.
A good financial planner will conduct a thorough diagnosis of your financial situation, chart out a plan and recommend actions that are in line with your goals and objectives.
A good retirement plan should address the following areas specifically with respect to the golden period of your life:
Cash flows: The most important aspect of retirement planning, especially for individuals without any pension income is to create a provision for sustainable cash flows required to keep up with inflating expenses and outflows. It is also important to keep in mind the tax implications that may apply to the cash flows and gains, be it income taxes or capital gain taxes.
Risk management: In the interest of setting up positive cash flows that can beat inflation, one tends to expose their investments to certain risks. This exposure to risk could potentially cause volatility in the value of the investments which could prove costly at this stage in life. Therefore, it is important to balance this risk by investing a part of your money in conservative assets that are less volatile so that you mitigate any risk associated with the growth assets within the portfolio. A financial planner will have the right tools to advise you on the right proportion of money to be invested and held in growth and conservative assets.
Emergency fund: It is important to anticipate the outflow of money on emergency grounds. An emergency can occur as an unforeseen or unannounced event. There is a possibility that one may have to shell out money from their retirement savings to cater to the emergency. Therefore, to secure your retirement savings is it imperative to create and set aside an emergency fund, that can be withdrawn in such situations.
Managing property matters: Real estate is one of the most preferred asset classes in India. It is not uncommon to find real estate as part of your investments, especially with people of this age group. A good financial plan will also address the management of assets in real estate / properties. Especially if real estate forms a very large portion of your life savings, it is important to understand how to monetize these assets. Whether to continue holding these investments and derive rental yields or to dispose of them and invest the proceeds in better and more liquid assets that can yield returns. Understanding the tax implication of selling a property is also quite important in this process. A financial planner will have the right tools to advise on the right proportion of money to be invested in liquid and illiquid assets to manage the portfolio more efficiently.
Health and medical expenses: It is common for people of this age group to have a large portion of their regular outflows going towards health and medical expenses. There can be situations where people spend a considerable portion of their retirement savings on treating health ailments and on medical grounds. It is important not to dig into your retirement savings especially when your lifestyle expenses depend on them. It becomes a priority to put in place adequate medical insurance to ensure such outflows on health grounds are taken care of by the insurance and the dependency on your savings to cater to these expenses reduce. It is generally better to put in place medical insurance at a younger age since it will either cost you more to take medical insurance as the age increases or you may not be eligible for one.
Tax planning: Planning for your taxes efficiently will reduce the tax liability and leave more money in your hands to spend. A financial planner is equipped with the right knowledge and tools to help you plan for and reduce your tax liability. One can also take advantage of the dual benefit of tax savings and good returns simultaneously, by investing wisely.
Leaving a legacy: One of the key areas of concern for people of this age group is to leave behind a legacy to their family and legal heirs. If this is an objective that you have then it is important to plan your investments and cash flows in such a way that a legacy corpus can be passed on to your heirs after your time. It is also important to ensure that the legalities of your investments are in place. Be it double-checking the nominee/ beneficiary in all your investments or be it putting in place a legally binding will to safeguard and pass on your life savings to your desired heir to inherit.
A good financial advisor will provide you with financial advice that’s best suited to optimize the quality of your life in this phase. The aim of retirement planning is to make you financially independent and manage your retirement happily, confidently, and comfortably. Financial freedom can make retirement the best phase of your life. PeakAlpha is an award-winning, SEBI-registered wealth management company that creates financial plans customised for every individual.
– By Sayi Krishna, Wealth Advisor, PeakAlpha Investment Services Pvt Ltd