Financial planning: Smart money moves to make after retirement
 |
| Capitalstars Investment advisor |
Remain invested in equities: Investors are often advised to redeem their equity exposure for debt funds and fixed income products as they approach their retirement age. However, a complete shift to fixed income products may prove detrimental to your post-retirement financial security. Fixed income investments seldom beat inflation rates and those in the higher tax slab often end up losing money after deducting tax from their inflation-adjusted income. A longer than expected life expectancy would make matters worse by increasing the risk of running out of your retirement portfolio.
Instead of shifting the entire equity portion of your post-retirement corpus to debt mutual funds and other fixed-income instruments, find your financial goals maturing within 5 years and invest the surplus in equity mutual fund schemes based on your risk appetite. This is because equity as an asset class beats other asset classes and inflation rates by a wide margin for time horizons of 5 years or more. Equity mutual funds are also more tax-friendly than most.
The beginning of your retirement life does not end the requirement of financial planning. While years of disciplined investment would have led to a sizeable retirement corpus, inflation and tax would continue to threaten its growth. Only a good financial plan and its smart implementation would ensure liquidity and longevity of your post-retirement corpus.
Fixed-income investments as long-term capital gains (profits after a year of investment) booked in excess of Rs 1 lakh per financial year are taxed at 10%.
Keep adequate emergency fund: The importance of an emergency fund for a retiree is as critical as for a working individual. In fact, the risk emanating from an inadequate emergency fund would be higher for the retirees as financial emergencies would force them to redeem their existing investments. This would exhaust their retirement corpus sooner. A financial emergency occurring simultaneously with bearish market conditions may even force you to redeem your equity investments at sub-optimal prices or at loss. Hence, estimate your mandatory monthly expenses such as utility bills, medical bills, insurance premiums, grocery expenses, etc for at least six months and park its equivalent in ultra-short-term debt funds or high yield savings account.
Invest your PF and gratuity proceeds in debt funds: Your retirement will give you access to life-long savings locked in provident funds, gratuity, and other retirement schemes. While many use the proceeds for buying annuities, they yield very low returns often underperforming even inflation rates. Instead invest the retirement proceeds in ultra-short-term, low duration and short duration debt funds to meet your short-term goals. These debt funds outscore annuities and fixed deposits in terms of liquidity and returns. The surplus money left after providing for short-term goals can be invested in equity funds and/or hybrid funds based on your risk appetite.
Buy adequate health coverage: Old age makes one prone to diseases and injuries, thereby increasing the share of healthcare costs in total expenditures. The high rate of inflation in healthcare services coupled with increased life longevity would push up the bill further. As there would be no employer-provided group health cover after your retirement, any unforeseen event leading to hospitalization might force you to redeem your retirement corpus. The only way to protect yourself is to buy adequate health cover, even if it comes with a higher premium. If you already have one, buy top-ups from your existing health insurer to cover the deficit resulting from the withdrawal of your employer-provided health cover. Top-up health policies cover the healthcare expenses exceeding the cover provided by your basic health policy. Buying a top-up health policy is far cheaper than buying an additional health policy.
Opt for a reverse mortgage: Reverse mortgage can be an excellent tool for supplementing cash flows for retirees owning housing properties but lacking adequate post-retirement corpus and/or pension income to support themselves. This facility allows senior citizens to pledge their house property for a lump sum amount or periodic disbursals spread over their residual lifetime. While the tenure of such loans usually goes up to 15 years, they can be extended until the borrower’s survival subject to the advance value of the house property. The repayment is not triggered by the borrower’s death or moving out of his house. The outstanding loan amount and interest accrued is recovered through the property sale, if the borrower or his heir fails to make repayment. The surplus generated from the property sale, if any, is distributed to the borrowers or his heirs.
