Friday, August 3, 2012
How to plan your investments once you are retired?
This is a guest post written by Manikaran Singal who is a certified financial planner and runs a personal finance blog - Good Moneying. Retirement is very important and critical stage in one’s financial life. This stage can be made more enjoyable where you relax, spend time with family, pursue hobbies if you have properly planned for that. But it can be most horrifying phase also where your regular income stream is no longer available, with no pension provision and where you have not saved enough to take care of your retirement needs. Due to the various challenges and risks associated with retirement, we recommend retirement planning should be given its due importance and starts as soon as possible. Retirement Planning works in 3 steps – Accumulation – Preservation-Distribution. Accumulation is the stage where we invest to generate a decent corpus which is assumed to take care of us during retirement years. This accumulation we do till retirement. In Preservation stage we become cautious about our accumulated corpus and we start coming out of risky asset classes and start shifting the corpus into debt, though savings doesn’t stop during this stage also, as our regular income stream is intact. Distribution is the stage when we make arrangements to use the corpus through interest, dividends and withdrawing capital which we have accumulated. In the complete retirement planning, distribution is the most important of all, as all our efforts of accumulation and preservation were directed towards this stage only. With a regular income stream no longer available, the savings made over one’s working years now have to provide for all needs. Now your investments need to create a paycheque for you. In accumulation and preservation stages the mistakes can be ignored as you were getting regular income, but at distribution stage, small mistakes can cost huge. Through this article, I will be discussing with you on the distribution stage of retirement planning and how you can plan your investments once retired. 1. First step is to prepare you on the risks front. Like : a) Longevity risk: We don’t know for how long we are going to live. Whatever life expectancy you have assumed during accumulation stage may not be correct. If you outlive that age and not used your corpus judiciously you may find yourself in financial soup. b) Health risk: At this age probability of health problems is much more. We don’t know till when health remains favorable on our side. And when it gets unfavorable how much of our accumulated corpus it may wash away. 2. Have a look at your expenses. This is very important as the ultimate target is about to generate comfortable income stream from the corpus to meet the basic and desired expenses easily. Here you may divide your expenses in 4 parts: Basic/desired/on dependents if any/Loan EMIs if any. Basic would include the family’s general and unavoidable expenses which may include the family gifts on various festivals/occasions, desired is what you want to do after retirement like going on annual or bi annual vacations, pursuing some hobby, some charitable or religious activity etc., On dependents means…situations where children are still studying or are not yet settled in life etc. and Loan EMIs. 3. Investment Options. When you have calculated how much is required, now is the time to look out for the options where you may park the lump sum amount to start getting regular income. Here one thing has to be noted that one should not ignore the growth aspect in investments and should give equal importance to that. To add to it, one should not get into wrong products with the lure of making fast money in the name of growth. Just reminding you again that mistakes made at this stage of life may prove very costly. Make 3 investment buckets by investing corpus in different percentages. Basic Bucket (50% -60%): Looking at the monthly requirement and pension inflow if any, one has to plan to fulfill the gap, for which one may use the products like Post Office Monthly Income scheme, Senior Citizens savings scheme , bank fixed deposits with monthly/quarterly pay-out options, Immediate annuity etc. I mean use those products which can supplement your monthly inflow. But here do keep in mind the taxability aspect also. All the so called safe instruments are taxable. So where the taxation crosses the acceptability criteria, then you may use Mutual funds Monthly income plans or park the amount in debt mutual funds and start systematic withdrawal plan, but please note in the latter you are withdrawing the capital part of corpus which should be last resort. Health Bucket (10%-15%): After arranging for your current monthly requirement, put some percentage of your corpus into debt mutual funds or cumulative fixed deposits as a health fund which will take care of your those medical emergencies where expenses jumps over health insurance coverage. Growth Bucket (20%-25%): Put the balance corpus or at least 20% of the total corpus in equity oriented Mutual funds diversified or index, to cope up with the inflation aspect and After every 5th year transfer the growth portion into the basic bucket, so the monthly income can be supplemented and put it in line with the increased expenses. Some Do’s and don’ts after Retirement. Do review your financial situation every year. Do buy adequate health insurance coverage for yourself and your spouse. Count the annual premium in the basic expenses. Don’t buy or gift any investment product to any of your family member other than you or your spouse. Avoid gifting child plan to grandchildren etc. Don’t part with your savings in your lifetime. You will be soft emotionally gullible target to the sellers. So beware. Do keep working even after retirement. Shocked!! But in many cases it becomes inevitable especially when you still have dependents, or paying Loan EMIs. The idea is not to enter retirement phase with the burden of Debt and dependents, and not to use the nest egg on these areas. Also please understand that stock trading is not working. Do take good care of your health. If at all you have any health problem better to take proper treatment. Many times I have seen people ignoring the health aspects due to the finances involved in the treatment. But please understand that your health is equally important for your wealth. Don’t overspend in retirement if you have not over invested while working. Don’t put your retirement corpus into Real estate due to the illiquid and unregulated nature of investment. Retirement planning includes much more than just investing. It needs some behavioral adjustments also. The ultimate goal is steady, dependable and lasting income. With careful planning we can balance the needs of inflation protected income and long term growth during retirement.