For A Financially Fit Retirement

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors
 

Retirement is an important goal of one’s life and hence should be given its due in the investment process. Unfortunately, many of us ignore this goal either by not planning for it properly or investing in a manner whereby we compromise on returns. Needless to say, it is vital to have a plan in place and build a portfolio that has the potential to keep you ahead of inflation. It is equally important not to withdraw amounts during the corpus-building process. While at times it may be necessary to do so, making it a habit can negatively affect your post-retirement life.

The pre-retirement period – 8-10 years before retirement – is quite critical for this important goal. That’s because most investors can be expected to have taken care of other important long-term goals like children’s education and buying a house by the time they reach this stage. Moreover, these are usually the best years in terms of capacity to save and invest as compared to earlier years. Of course, to get the best out of investments at this stage, the key is to have the right asset allocation. Asset allocation is important because it determines how much risk you are taking and what can you expect in terms of returns.

Investing haphazardly could either result in building a portfolio that may either be too conservative or too aggressive. Considering the time on hand before you need to start generating regular income, equities must be an integral part of the portfolio. Of course, the proportion of allocation to different asset classes holds the key from the point of view of risk and reward. One thing that must be avoided during this stage is to take a new loan as it can disrupt your investment process. There may not be enough time to repay and that can put pressure on your investment process for retirement.

If you are already repaying an existing loan, the attempt should be to repay it as early as possible. But obviously, the ability to do so will depend upon the quantum of loan and surplus available. Any lump sum received by way of bonus, etc. could be used to pre-pay the loan. However, before doing so one must consider the residual tenure and the rate of interest. As already explained, asset allocation is the key to your ability to build your retirement kitty. Asset allocation is also important in terms of determining the level of liquidity, income generation and tax efficiency of returns.

Many investors have a tendency to invest heavily in real estate with an objective to generate regular income post-retirement. There are pit-falls in this strategy as it can make you compromise in terms of liquidity, quantum of income due to low rental yields as well as post-tax returns. Besides, managing regulatory and operational affairs relating to real estate can be quite cumbersome, especially if the property owned is not in the city of your residence. On the other hand, financial assets in the right mix have the potential to do better than real estate on all these counts.

Considering that you may require money at different stages of the post-retirement period and need to generate higher regular income, investing in financial assets like equity and debt through an efficient investment vehicle like mutual funds can be a much better option. Mutual funds provide a number of options that allow you to generate tax-efficient regular income and make your money grow at a healthy rate. Besides, mutual funds are diversified by nature and offer strategies like systematic withdrawal plan (SWP) to generate a regular income.

The tax efficiency of returns can make a huge difference to what you get to keep and hence it should be an integral part of your investment strategy. Mutual funds offer options to save taxes at the time of investments as well as offer tax-efficient returns. For example, an investment option like equity-linked saving scheme (ELSS) allows one to save taxes under Section 80 C and also provide tax-free returns. Then, there are retirement funds offered by a few mutual funds that offer the same benefits. In fact, these funds also allow you to change asset allocation at a later stage to protect gains and offer the option of SWP to generate regular income.