Life-stage Based Investing Series: Retired

Your retirement years, although free of the daily pressures of work, will bring into your life a unique set of finance related challenges that are sure to occupy a significant degree of your mind space.

Have I saved enough? What if my money runs out? Should I invest aggressively and aim for high returns, or play it safe instead? Should I use up my resources, or aim to bequeath them to my heirs? Should I try to find some part time work? These are just some questions that may keep you up at night after you've retreated from the workforce for good.

This article aims to simplify some of the vital steps you ought to take in the period immediately following your retirement. Make sure you do these, and you'll be on safe turf.

Time to take stock
First things first - you need to take stock of everything you own. Collate all your holdings together - your equity shares, mutual funds, life insurance policies, real estate, health insurance plans et al. Draw up the details of your liabilities as well. Knowing exactly how much you own, and in what asset classes, is vital at this stage.

This is a good time to take stock of your expected earnings by way of your pension, rentals, or incomes from annuity plans as well. All these need to be considered while drawing up a retirement cash flow table that is both useful and realistic.

A quick word on de-risking
I personally believe that the requirement to de-risk has been emphasized so much in recent years, that it may have worked to the overall detriment of retirees. Yes; it's a good idea to de-risk your portfolio at this stage, but don't make the mistake of swearing off high growth assets altogether. Age alone can no longer be considered the singular input for determining risk tolerance.

Here's a thought: Your post retirement portfolio is likely to have a time horizon of anything from 15 to 25 years (with intermitted drawings, of course). That's a fantastic time horizon for an equity investment, isn't it?

Here's another thought: the difference between an 8% return on your portfolio and a 10% return on your portfolio can mean a 10% difference in your post retirement monthly income. There's a lot you could do with 10% extra at this stage in your life; therefore, this is a risk worth taking.

Aim to keep between 20-30% of your post retirement assets in high growth investments such as equity mutual funds. Just make sure you stagger your entry by way of STP's, and that you don't' fall prey to your speculative instincts and try to time your entries and exits; that's fraught with risk and could potentially wipe you clean. Be an investor, not a trader.

A cash flow table is vital
A well-constructed retirement cash flow table will take into account your currently provisioned monthly income, inflation, expected returns and expected lifespan. You may also want to set a floor value target for your liquid corpus - a safety net of sorts. The cash flow table should also take into account the approximate value of annual drawings for leisure trips and other fun activities. It doesn't have to be all drudgery!

A poorly constructed cash flow table is one that maintains a uniform drawing amount throughout your retirement age with the hope of 'preserving' your corpus. Inflation isn't going on hold, you see.

Lump sum received - now what?
It's very likely that you'll enter your retirement with a sizeable lump sum corpus. The question of "what to do with this money" has, in my experience, led to significant consternation for many! Never before has a time of windfall also been such a confusing one.
Let's start with what not to do - do not buy an annuity with this money. To know more about why not, also read Should You Buy An Annuity?

You may end up spending a fair bit of time deciding what to do with your hard won savings. Make sure you don't leave these funds lying idle in the meantime. Opt for liquid funds or short term fixed deposits.

You are also advised to steer clear from any products with the words 'structured product' and 'close ended' in them. If you can't understand the product within ten minutes, avoid it. Go simple.

Locking in all your money (or a large chunk of it) in a single property isn't a good idea either. Keep in mind the associated costs of owning a property, the poor rental yields and the hassles associated with tenancy, in general. Do you want to subject yourself to them?

In my opinion, nothing works better for retirement moneys that a well selected, fairly diversified portfolio of Mutual Funds. At this point in time, you may want to consider Dynamic Asset Allocation funds as the core (50%) of your portfolio and keep the rest in debt funds, with an SWP (Systematic Withdrawal Plan) creating a synthetic income that comes into your bank account each month. More on Dynamic Asset Allocation funds here

Health Insurance
Burgeoning medical expenses may burn some deep holes in your pocket post retirement. If you haven't got a policy running already, you might want to take one. Bear in mind that it's likely to be frightfully expensive (especially if you have pre-existing conditions).

In general, it's a good practice to take out separate policies for yourself and your spouse in your retired years. A floating one may just be prohibitively costly.

Counterintuitively, there may be some situations where taking a health insurance won't really make sense in your retirement years; simply from a cost-benefit standpoint. For instance, a 65-year-old with pre-existing conditions such as diabetes or hypertension may need to pay Rs. 40,000- Rs. 50,000 per year or more for a 5 Lac cover. Whether or not this "one in ten" risk is worth bearing or transferring, is a subjective call. If you've got sufficient assets to cover this 5 Lac, you may just want to skip it - especially if there's a hefty waiting period involved. Instead, you could utilize part of your lump sum corpus as a 'medical emergency' fund, parking it away in a safe, load free, easy to liquidate debt mutual fund that grows at 7-9% per annum.

In Conclusion
You're finally free from the rat race. Don't forget to enjoy yourself thoroughly! Take care of your health and wealth, and your retirement years will truly be 'golden'. On the other hand, an irresponsible approach towards any or both of the above can lead to significant strife. Choose your future course of action wisely.