16 April, 2016

How to realign investments after you retire…

Retirement is a bitter sweet experience. Many have been looking forward to it. But when it is round the corner, one does get jittery. If you have retired & want to know what you should now do, you are reading the right piece. Go on…
Questions loom…  Have they saved enough? Where is the regular income going to come in from? Are the current investments in the right places? Are there changes that need to be done now?
These questions may be keeping you awake at night more effectively than a double dose of caffeine! Also all these days there was fixed routine. Much as you may have hated it, it was there. After retirement, you now need to figure how to spend all that time, from morning to night.
At first flush, it seems easy. We all tend to think, we’ll go for a invigorating morning walk, have breakfast on the way in that tony joint, come home to a cup of coffee, read papers & magazines, catch up on music, watch TV, visit friends etc. All these may happen and still there will be huge chunks of time to fill. Plus, one may not be able to do all these everyday.
So, you need to think through what you would like to do after retirement and not just assume that you can read newspapers, do some social work & dreamily see the world go by. Most people find this surfeit of time – maddening!
Now, let’s confront the first problem, which lends itself to tackling more easily.  Let’s break it up & solve it in parts.
Estimate expenses - The first thing to do is estimate expenses in the retirement phase.  This includes the regular living expenses, medical, travel, insurance & other such expenses. Some people want to relocate to their home town or to another place.  This has to be factored as well & the probable expenses in the new place should be considered. A tip – travel expenses tend to be high in the first few years of retirement as one would want to visit relatives & friends, see places which somehow eluded during their working days as well as catch up more on family events, functions etc. This extra expense needs to be budgeted for.
Setup an income stream -  The comfort of the salary cheque ( for most people ) is now history & just a fond memory!  Surprisingly, the workplace which one went to work & sometimes hated, now looks like a wonderful place!  Many of those colleagues ( including the prickly accountant ) look like chums, in the rear view mirror.  You could hardly believe that you cursed your employer & even hated some colleagues while working!  That’s what nostalgia is all about.
But coming back to terra firma, a proper income stream on a regular basis is vital. One needs to check whether the expenses will be supported by the corpus or not after accounting for inflation. There are many calculators available online that can tell you that. That will soothe the jangling nerves a bit. 
Risk Assessment -  Before deciding on where to invest for that, you need to get the asset allocation right.  What I mean here is that you should get to the right mix of various assets to be invested. For doing that, you need to look at your Risk tolerance. Not all of us are risk takers. Some of us are aggressive & some of us ultra-conservative. A lot of us are in between. It is important to know where you fit in, on this continuum. Once this is known, assets can be allocated accordingly.  Risk assessment tools are available on the net which should give you an indication. We use validated tools in our Financial Planning practice, when we do the planning exercise.
Setting up an income stream -  Based on the results of the risk tolerance analysis, investment candidates can be chosen.  They should be chosen such that some of them would be useful to setup cashflows immediately, as a steady income stream needs to be setup.
The following is a list of products which will help here –
  1. Tax Free Bonds – which can give steady, tax-free income for long periods – upto 20 years.
  2. Systematic Withdrawal after investing first in debt funds – this also ensures steady stream of income & is very tax efficient.
  3. Investing in Equity oriented MFs, which can give regular dividends, which are tax free
  4. Investing in Senior Citizens Savings Scheme / PO MIS for steady income. However, the interest income derived from this is taxable as income, which may not be very useful for those in higher tax slabs.
  5. Investing in FDs – both banks & corporate. Again fully taxable, but is a simple product that is relatively low risk
  6. Debentures, Bonds etc. on merits
  7. Annuity ( pension ) products to derive steady income. Again may not be very efficient on taxation front as annuity is taxed as income.
  8. Rental income – for those who have properties. Again, rental income is taxable
Investments for the future -  Ideally, you should invest some portion of your retirement corpus for the longterm.  They would be needed some time in future. Equity oriented investments should be invested for the longterm as they tend to perform well over longer time horizons. Even debt investments, which are not required right away should be invested in the cumulative mode, so that it accumulates over time. Properties should be consolidated and only one or two properties should be kept aside for receiving rental income. Too many properties would be a hassle to manage. If there are many properties, they should be liquidated and invested in financial assets, which can offer uninterrupted returns.
Medical Insurance – It is ideal to have medical insurance in place well before one has retired. If  not, one should look at the possibility of getting a medical insurance cover, at least to cover to some extent. A cover of about Rupees three lakhs atleast is recommended, if one can get insurance at this stage. The other option is that seniors can be covered by their working children, under their employer given group medical insurance cover. Group medical insurance even covers preexisting illness and would be a boon, if available.
Contingencies -  It is ideal to set aside some money for contingencies. Medical contingencies are the obvious one. There could be other contingencies that may need to be provided for.  According to requirements, a contingency amount may be kept aside in a debt fund or fixed deposit.
Diaper check!  -  After doing all these, one needs to review one’s investments on a regular basis. Expenses also need to be monitored, from time to time.  Keep a tight leash on them. Discuss with spouse when expenses balloon & get a buy-in to keep it under check.
Any “amazing investment ideas” need to be thoroughly examined before investing.  Also, you need to look askance at any “fantastic returns” some scheme is offering – if the proposition looks too good to be true, it probably is. Give it the skip. 
Resist the temptation to pass on most of one’s assets to one’s children or other worthy beneficiaries. Small gifts are fine.  Also, one should not allow one’s properties to be pledged as this can shake the foundations of Retirement planning itself.
In a nutshell, allow your common sense to reign supreme. Stay within the plan. Play safe. And enjoy your retirement. It is a well-earned long holiday!
Please also look at my earlier articles on Retirement...
Article on Retirement mistakes that people make. 
Another piece on approach to take for a well funded retirement
Hope you like these posts.
Article by Mr. Suresh Sadagopan, first published on Linkedin.

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