Retirement planning needs a serious rethink

Want inflation beating return post-retirement? Here's how equities can save the day While we may think that having Rs 1 crore in our retirement corpus is enough, in reality, it is not. With inflation, its value shrinks drastically. Read on to find out how diversifying your investments across various fixed income schemes, annuities, arbitrage funds and other equities, can help your money grow in the long term, and ensure that your golden years stay golden

About 20-25 years ago, Rs.1 crore seemed a very large amount. However, the people who are set to retire in a few years might not agree. If invested in a risk-free instrument that offers 7.5% return, a corpus of Rs.1 crore will yield a monthly income of Rs.62,500. Some might find this amount sufficient to fund their monthly expenses today, but inflation will keep eating into this sum. In four years, even a modest 6% inflation would reduce its purchasing power to less than Rs.50,000. In the next four years, to less than Rs.40,000. “Just like compounding works to build your savings over the long term, inflation works to decompound your savings in retirement,” says Deepti Goel, Associate Partner, Alpha Capital.

Best ways to invest Rs.1 crore
Spread it across various instruments for optimal returns with minimal risk.

For retirees, the challenge is to deploy their nest egg in instruments to earn decent returns without taking too much risk. They don’t have the luxury to wait it out in case the markets decline, so they need to put the bulk of the corpus in safe instruments. At the same time, a 100% fixedincome portfolio is not a good idea. Some portion of the corpus must be allocated to growth assets so that the portfolio is able to beat the march of inflation.

The retirement corpus should be spread over a basket of instruments. The first option for any retiree should be the Senior Citizens’ Savings Scheme. This government managed Post Office scheme gives assured returns of 8.2%, which is higher than that offered by bank deposits to senior citizens. Put the maximum Rs.30 lakh in this scheme. If your spouse doesn’t have a separate account, you can put another Rs.30 lakh in her name. Do this before the RBI cuts rates because interest rates of small savings schemes are linked to government bond yields and are reset at the beginning of every quarter. Some portion of the corpus must also be put in annuities. Annuities offer assured income for life, which reduces the longevity risk. At least 30% of the nest egg should be invested in an annuity. When pension plans from insurance companies and NPS investments mature, some portion of the corpus is mandatorily put in annuities.

For some retirees, tax is a big headache that reduces their overall returns from their retirement savings. Systematic withdrawals from debt and hybrid funds used to be a very tax-efficient alternative to fixed deposits, but changes in tax rules two years ago removed that advantage. Instead, retirees should consider putting money in arbitrage funds. These are equity schemes, but earn stable returns through hedging. Like equity funds, long-term capital gains of up to Rs.1.25 lakh are tax-free in a financial year. “Arbitrage funds are a very tax efficient option for retirees,” says Delhi-based Financial Adviser Tamanna Varma.

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A retired investor won’t need the entire corpus immediately. Some portion of the corpus, say 10-20%, can be stashed away from future use. This portion should be invested in equities. The returns from equities are more stable when invested in a diversified portfolio of stocks, not from individual picks. A well-chosen index fund or a flexi-cap scheme will work best for a retiree.

This story originally appeared on: India Times - Author:Faqs of Insurances