The current situation of falling fixed income returns, rising inflation, and volatile equity markets are of special concern for those in their mid-50s, perhaps 3-5 years from retirement. This group of investors would like to maximise their retirement corpus by parking funds in safe liquid instruments that offer high returns over the next few years, and high interest yielding monthly income schemes post retirement.
Should you choose debt instruments or equity?
The Covid-19 uncertainty is impacting most financial instruments, and those approaching retirement must take a judicious call on where to keep the corpus invested. If your resources are limited, you need to have investments that are safe, liquid, generate above-inflation growth, and are sufficient for 20-30 years after retirement. The income required for basic household expenses will grow every year with inflation — so what will be sufficient for you at age 60 will no longer be enough when you are 70. While debt instruments are safe, equity holds the key to growth of your corpus.
“Debt instruments alone would not be able to fund your retirement needs and you need to keep some part of the corpus in equities so that it expands your corpus in the meantime. Also, you may have to break and utilise a part of your corpus because interest income may be insufficient to meet your retirement needs after a point. One must be mentally prepared to dip into the principal,” said Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors.
Should you go for capital preservation, i.e., focus on preventing loss in a portfolio?
It is of utmost importance for those approaching retirement to start consolidating their portfolio. Equity investments across mid- and small-cap schemes should be diverted towards index funds, large cap funds, and in part towards debt schemes. Individuals in the highest tax bracket should move fixed deposits with banks into debt products that yield better interest, such as tax-free bonds, debt schemes of mutual funds investing in AAA-rated papers of high quality firms, etc.
Investors must plan to redeem equity investments when the market is at a high in the near term, in order to maximise their returns.
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Should those who have a second home liquidate it?
If you invested in a second home for rental income, it is time to evaluate the investment and returns. If you bought for Rs 50 lakh 10 years ago (now valued at Rs 70 lakh), and are getting a rental income of Rs 15,000 a month (or Rs 1.8 lakh per annum), the rental yield of the property is 3.6%. If you sell for Rs 70 lakh and invest the proceeds in a debt instrument earning 5%, you will get an annual interest income of Rs 3.5 lakh — almost double. If you split the sale proceeds into debt and equity, and are able to generate 8% compounded annual growth rate over 10 years, your annual return would be Rs 5.6 lakh — over three times the rental income.
Remember, the cost of maintaining the house will eat into your retirement income, and that almost 90% homes in India have no property insurance, which puts the asset at risk.
“Real estate can’t be easily liquidated, and can’t be sold in pieces. In equities, one can liquidate the required amount of units. Also, it is easier to distribute financial assets among successors,” Dhawan said.
How should you plan for retirement?
Say you are 55, and will retire at 60. If your current monthly household expenditure is Rs 50,000 (Rs 6 lakh per annum), at an inflation of 5%, your annual expenditure in the first year of retirement would be Rs 63,814 per month (Rs 7.65 lakh p.a.); at 6% inflation, it will be Rs 66,911 per month (Rs 8.02 lakh p.a.).
While annual household requirement may rise every year at the pace of annual inflation, lifestyle inflation is a bit higher. So at 5% inflation, if you need Rs 7.65 lakh p.a. in the first year of retirement, you would need Rs 12.46 lakh p.a. after 10 years of retirement.
The next step would be to figure out a corpus that can earn you Rs 7 lakh-8 lakh p.a. At an average annuity rate of 5%, you would need at least Rs 1.6 crore to earn an annual interest income of Rs 8 lakh. As interest rates are falling, at a lower annuity rate of 4%, the corpus needed to earn Rs 8 lakh p.a. would rise to Rs 2 crore.
EPF is a key part of your corpus growing at 8.5% p.a.; you can also invest in GoI bonds offering around 7.1%, tax-free bonds offering around 4.5%, and debt schemes of mutual funds for growth. While the debt and equity portions must add up to between Rs 1.6 crore and Rs 2 crore to fund your post-retirement monthly expenses in the next 5 years, you must not forget the equity play to boost your corpus during the retirement period.
Suppose you invest Rs 20 lakh (10-20% of overall corpus) in index funds or large-cap funds (at age 55) for a period of 10 years, at 10% CAGR it will grow to close to Rs 52 lakh by the time you are 65. At 9% CAGR it would grow to over Rs 47 lakh. It is important to meet a financial planner to better understand this.
Where should you invest for an annuity income?
Go for a mix of products.
For regular income, two schemes to consider are Pradhan Mantri Vaya Vandana Yojana (PMVVY), and Senior Citizens Saving Scheme (SCSS). They are available to those over 60; the investment limit is Rs 15 lakh; interest is around 7.5% now. PMVVY offers a monthly payout up to around Rs 9,000; SCSS gives a quarterly payout. If spouses invest Rs 15 lakh each in PMVVY, the monthly income can be Rs 18,000. A part of the retirement corpus can be used to buy an annuity plan with an insurance company; a part can be invested in a systematic withdrawal plan of debt mutual funds that offer better returns and provide tax arbitrage. Go for debt schemes that invest in AAA-rated papers of high-quality companies. Debt hybrid schemes that invest 65-90% in government bonds and AAA corporate papers are a good option.
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