No matter how elusive today, retirement will be a reality someday for all of us. Regular earnings will stop but the expenses won’t.
When you think retirement pool, you are already thinking of safety and stability when it comes to the choice of investment.
The other connotation we have with retirement money is building an investment structure that gives you a regular income. For these reasons, retirement investing is often linked to fixed income option both before and after retiring.
However, with the expectation of high inflation in a growing economy like India and better tax efficiency in long term returns, you can no longer overlook equity as a major contributor to your retirement preparation and post-retirement utility.
Why fixed income options are not enough
There was a time when returns from fixed deposits and other savings schemes backed by the Government delivered high single-digit or even early double-digit returns. Earning 10%-12% per year assured returns from secure bank deposits or savings certificates or even from PPF was a reality.
This is no longer the case. Returns from such options are now down to a range of 5%-7% a year (pre-tax). Moreover, annual inflation in the economy hovers in the same range. Hence, whatever you earn through these options is just eaten away and the real return you are left with is nothing. Your money’s value in the long run with low return assets doesn’t grow, thanks to the high level of inflation in our economy.
While the retirement age remains at 60-65 years, the life expectancy progress means that you may have at least another 20-25 years of living in this no-income, retirement zone.
Now, if you relied only on fixed return investments, the money you saved is unlikely to be worth a lot more net of inflation, at the same time lifestyle expenses, catch on. You may find yourself wanting when it comes to fulfilling life’s desires as you barely cover daily expenses with the amount you saved.
A dash of equity before and after
Long term equity investing is the solution, if you want your retirement pool to cater to all those non-essential wants post-retirement and maintain a lifestyle that you are now used to. Before retirement, you may want to have relatively high exposure to equity, at least up to two years prior to the retirement year.
Once retired, if you have a pension income to rely on, you can continue to have more than half your investment pool invested in equity. If your pension is not enough, use your accumulated equity investments to draw a systematic withdrawal plan which can complement any other annuity income you may be receiving. Equity investments have the ability to deliver inflation plus returns, and compounding helps in building wealth over a long period of ten-fifteen years.
Once this wealth has been built and you are close to retirement or retired, you can protect the downside on the accumulated corpus by shifting an appropriate amount to debt each year or two, but leave some in equity which will keep growing for the next 20 years as well.
Debt investments are required to cushion the uncertainty of retirement, but equity is also needed to grow your wealth through the expensive and long retirement years. Find a balance between debt and equity, but don’t let go of the wealth creator asset even post-retirement.