Projecting your corpus is just step one. From mastering the equity “bucket strategy” to navigating fixed income and SWPs, here is your comprehensive guide to ensuring your savings outlive you.
āOut of sight is out of mindā is often the case with us; but try that with retirement savings, and it is sure to come back to haunt you in your senior citizen years. Plan retirement with care, and your life will be set till you live. Here are answers to top questions on your mind on retirement planning:
The Crux Of Retirement Planning Seems To Revolve Around Projecting Expenses Accurately As Well As Assigning A Life Expectancy, Which Is Completely Not In Our Hands. How Does One Arrive At A Corpus That Is Appropriate?
It is true that one cannot arrive at the precise number required as there are at least three variables involved ā post-retirement expenses, inflation rate and life expectancy.
To calculate the retirement corpus, the best strategy is to maximize the savings so that you will have more than enough. Expect that you will retire at 60 and live to 100, that you will have no retirement benefits from your workplace and use 6% inflation on current monthly expenses (usual inflation assumed by financial planners). For eg, if you are 35 now, spending Rs 75000 a month and are yet to start saving for retirement, using a simple retirement calculator will tell you that you will need about Rs 10-11 crore.
In reality, you will get some retirement benefits from your workplace and most of us donāt live till 100. You may retire later than 60 or continue to earn some post-retirement income by taking up limited work. Besides, structure of expenses could become more discretionary. You will no longer have EMIs or school or college fees to compulsorily pay for. Household expenses may reduce as children move out or start contributing. If you have a comprehensive health policy and critical illness cover from early on in life, your corpus and post-retirement expenses wonāt go out of whack.
Bottomline: Use 2-3 scenarios to project a baseline and topline number for a retirement corpus and save what you realistically can, with the aim to retain your current quality of life in later years. Savings for retirement should be separate and not mixed with or dipped into for other goals.
Where Should I Invest For Retirement?
Since retirement savings is a long-term game, invest in equities to compound your money at rates higher than inflation during your corpus-building years. The mutual fund route is a good option as monthly SIPs put your contributions on auto pilot. Start investing for retirement as early as possible even if they are small instalments.
In practice, most of us who are salaried, have EPF contributions automated in our pay structures, which also count towards retirement. VPF and NPS contributions are popular options for tax breaks (under old tax regime) as well as tax concessions on withdrawal of the corpus on retirement.
However, when you build your retirement corpus or withdraw it, the focus should not be only on reducing tax outgo. It should rather be on generating a post-tax return that will comfortably and consistently beat inflation. Your asset allocation should be in line with your lifestyle requirements post-retirement as well as your ability to take risk.
Bottomline: A quick start as well as maximizing investment in equities is essential to ensure sufficiency of income in your retired years. Otherwise, you will be forced to compromise on your lifestyle, take higher-than-necessary risk for higher returns during your post-retirement years or deplete your corpus during your lifetime.
In The Home Stretch To Retirement, How Can You Preserve The Gains You Have Made?
When you have a majority of your retirement savings in equity, it is essential to prudently preserve the gains in the years closer to retirement. Falling or volatile markets (like what we have been seeing since September 2024/ the Covid crash, etc.) in the 2-3 years prior to retirement can erode the savings as well as cause stress.
Closer to retirement, assess how much you will need in the first 3 years after retirement and move it to safer mutual fund categories like debt funds and/or other fixed income options. When assessing the need, keep in mind other investments like EPF and NPS too which you can tap into, once you retire.
Bottomline: Take the help of an advisor to work out how and to what extent you can book profits in equities/equity mutual funds and reinvest in safer avenues for near- and medium-term needs.
What Is The Best Way To Deploy Corpus In Equities After Retirement?
Many investors tend to think of equities as a high-risk avenue for deploying post- retirement corpus and veer towards fixed income / annuities. But increasing life expectancy and higher services inflation ( eg. Medical, travel & tourism, etc) means that you will need the compounding power of equities to meet your post-retirement needs as well. Here is a practical strategy that you can follow:
- Keep emergency cash (for out-of-pocket medical expenses, etc.) and the corpus needed for monthly expenses of the next 3 years in debt funds or fixed income.
- Corpus needed for beyond 3 years & up to 5 years can be in safer equity- oriented fund categories like arbitrage funds, equity savings funds, balanced advantage funds and other hybrid funds.
- Corpus for beyond 5 years can continue to be fully invested in equity mutual funds.
- Refill emergency money as well as the corpus for near-term needs in the debt bucket from the hybrid bucket as and when needed. Simultaneously, refill the hybrid bucket from the equity bucket.
Bottomline: Equity investing in the post-retirement phase is not an option, but a necessity. Invest responsibly, and it will give you a good life. Invest irresponsibly, it could end up depleting your corpus in your lifetime.
How do I choose fixed income products post – retirement?
As discussed earlier, you should ideally hold only what is always required for the immediate 3 yearsā expenses in fixed income. When investing in deposits, bonds, etc. you will be locking into the interest rates prevailing at the time of investment. Hence, you need to be nimble on your feet when choosing the instruments.
Hereās what you can do:
- When investing at a high point in the interest rate cycle, bank deposits or post office schemes can be a good choice. You can also invest in long-term government securities around the time yields peak.
- When investing during the low interest phases, you may have to hunt for better returns by investing in slightly higher risk instruments such as NBFC/corporate deposits or bonds. When doing so, keep in mind that return of capital is as important as return on capital and donāt go overboard on risk-taking.
- Choosing floating rate bonds will help you go with the flow and ride the interest rate cycle.
Bottomline: Invest in a mix of tenures so that while one part of the portfolio can be invested in higher rates for longer, the other part can be churned based on prevailing market rates, your expense requirements (as expenses move up with inflation & other need, higher principal amount will be needed) as well as your risk appetite.
How Should I Use Swps For Post-Retirement Needs?
Unlike deposits or bonds which preserve your capital /principal, SWPs involve withdrawal of capital at some stage.
If you are comfortable with the idea, you can invest in debt funds instead of/or alongside deposits/ bonds for meeting regular income needs. Liquid, money market, low & short duration funds, corporate bond funds and banking & PSU debt funds are some of the fund categories you spread your investments across.
The idea is to invest in categories where NAVs donāt swing widely, where both interest rate risk and credit risk are low and where the returns are slightly higher than traditional deposits. This will ensure that you can keep withdrawals predictable and in accordance with the needs, and at the same time, not run out of the corpus too early. As your expenses move up and/or your corpus comes down, you can refill this bucket.
Bottomline: You need to arrive at that withdrawal rate which will not deplete your corpus early but at the same time, provide enough year after year. Usually, it is assumed you could withdraw something equivalent to the return that the underlying fund gives (usually 6-8%). But the ideal number could be lower. The withdrawal rate is based on several factors – the corpus, the trajectory of your expenses, your equity allocation post-retirement, as well as life expectancy. It is best to discuss your āsafe withdrawal rateā with your advisor.
Read our previous “Top of the Mind” article: The 3 Pillars of Post-Retirement Passive Income
