What is more important for retirees; preserving capital or preserving the value of capital?
What is more important for retirees, Taking a little risk to generate inflation-protected income of Parking money in Fixed income and outlive your retirement corpus and be dependent on Children during the last phase of retirement OR generating Inflation-Protected Income?
One of my prospective Client Retired last month and got all his retirement corpus. He wanted to create a regular stream of pension as he is not getting a pension from the employer.
During our discussions for selecting investment products for his retirement portfolio, he wanted to have only fixed return safe investments such as Senior citizen Savings Scheme, Pradhanmantri Vay Vandana Yojna and Jivan Shanti Policy etc. etc.
While Special Schemes created by the Government keeping the social security of Retired senior Citizens in mind are perfect for parking retirement money for fixed guaranteed returns and safety of money, but the strategy may create a situation wherein client will soon start consuming capital and would consume relatively quick as Inflation will increase his living cost and his portfolio all parked in fixed return may not match up with inflated pension requirements.
My Prospective client observed, what all retirees from his batch are doing and picked Jivan Shanti Deferred annuity as one of the options for parking his retirement money based on earning promise of Rs. 12,000 per annum starting from the 6th year from Investments of Rs. 1,50,000. His perception is that he is getting 8% per annum ( Rs. 12,000 for Rs. 1,50,000) ! If we calculate IRR its approx 6-7% considering the first 5-year investor is not getting any cashflow.
If one can make out the thought process of retirees from above and how they misinterpret products real returns as they lack basic financial literacy.
Which brings us the main point of what is more important preserving capital or preserving the value of capital?
Retirees may not ‘want’ to take Volatility Risk to invest their retirement corpus but they may ‘need’ to take.
It all depends on How much is their retirement corpus and how much is their monthly expenses. If their corpus is less as compared to their monthly pension need and if they choose to Invest into secured investments generating inflation meeting returns, they might preserve their capital but soon they will start consuming their capital to finance lively hood and may outlive their retirement corpus.
In such a scenario it will be painful for them to again become financially dependent on their children at such age and that too after living independently throughout life.
The best way is to plan a portfolio in such a way that a small portion of the portfolio is parked in equity-related investments which can provide growth or inflation protection in such a way that their portfolio survives as an estate to their wards.
Retiree should consider inflation and Reducing Interest Rates seriously while planning for their retirement portfolio to generate inflation-protected income.
The best way to plan for such a portfolio is to use a bucket strategy wherein bucket of the portfolio is created for different needs, the first bucket is created for withdrawing pension, the second bucket is created for protecting money from losing value from Inflation, and Third or more bucket can be created to provide growth to the portfolio so that retiree do not outlive their retirement corpus.
Other issues you need to consider are ;
1) You need to provide for your health expenses as well.
2) Before parking your money into growth bucket, you need to provide for at least 10 years of monthly expense using initial buckets
3) Equity investments through mutual funds are volatile in short term but will generate post-tax positive real returns so after providing for the initial 10 years through bucket strategy, you can always park into equity to provide inflation protection.
So do proper planning while investing for your Retirement Income.
By the way, if you need my help in your post-retirement planning, pls book my 1-hour free consultancy call by clicking here.