An unconventional approach to retirement investing

Authored by Ajit Menon, Chief Executive Officer of PGIM India Asset Management Pvt Ltd.

Population ageing is poised to become one of the most significant social transformations of the twenty-first century. The implications of this will be seen in nearly all sectors of society, including labour and financial markets, the demand for goods and services, such as housing, transportation and social protection, as well as family structures and intergenerational ties.

This is according to a United Nations report which also states that globally, the population aged 65 and over is growing faster than all other age groups. Living longer is an underappreciated retirement risk, leaving everyone grappling to find solutions.   

Add to that the fact that we do not have a conventional and comprehensive social security plan in India. The challenge in front of every stakeholder is real. Thus, we all need to start planning and investing for our retirement diligently. Retirement planning involves estimating your expenses during retirement, accumulating a sufficient corpus and investing it in such a way that it covers the expenses.

Once you achieve this corpus, how you deploy and use this corpus also plays a crucial role in sustaining the corpus for a longer period. Even if you are falling short of your desired retirement corpus, you may still have a comfortable retired life. A good advisor can help you in assessing your risk appetite and goals.

One possible approach could be to think of allocating into 3 buckets. One can reduce the anxiety around how one fare in retirement years using two hacks: “The Three Bucket Strategy” and “skill monetisation”.

The Three Bucket Strategy advocates asset allocation of your retirement corpus into different “buckets” based on the time horizons you would withdraw from each of these. The first bucket meant to cover the initial years (say 3-5 years) of retirement would primarily invest in safer instruments such as short-term debt.

Retirement expense and retirement corpus numbers are rounded. Returns assumed as 8.63 per cent for Conservative hybrid, 11.5 per cent for Aggressive hybrid, and 12.93 per cent for Equity. This is to explain the concept and for illustration purposes only. It should not be construed as an investment advice. Returns are calculated by taking a mean of 10-year rolling returns between 01/06/13 and 30/05/23 for various benchmarks.

Assuming you accumulate a retirement corpus of Rs 2.10 crore at the age of 60 years. In the first scenario, you invest the entire corpus in a conservative Hybrid Fund and start withdrawing Rs 1 lakh each month accounting for 6 per cent inflation, your corpus will last for 23 years, assuming an 8.63 per cent return.

In the second scenario, you split the 2.1 crore corpus equally (33 per cent each) into three different funds: Conservative Hybrid, Aggressive Hybrid and Equity. With a 33 per cent allocation to equity, the corpus lasts for infinity, assuming the same withdrawal of Rs 1 lakh per month at 6% inflation.

In the third scenario, even if you can achieve 70 per cent of your target retirement amount (Rs 1.5 crore) you can still sustain your corpus longer if you supplement it with a gig income. The third example shows that your gig income of 30,000 monthly invested in equities can help you sustain your corpus for 59 years after your retirement.

As you can see, the Three Buckets Strategy can help you sustain for 59 years even if you manage to accumulate only 70 per cent of the corpus. Thus, one should not fret about achieving a certain financial number.

Further, one may look to diversify and monetize their skills. It could be anything from teaching to being a yoga instructor to becoming a content creator, dog breeder, trainer, volunteer and more. Having multiple skills can provide an income stream in retirement and a sense of purpose when one suddenly finds oneself relieved of all duties.

As investors, we may succumb to a range of behavioural biases which can derail our goals. For instance, you may have the urge to withdraw from your retirement corpus to fund any other goal – a holiday, children’s higher education or a luxury car. To overcome this, a goal-based investing approach helps you earmark funds for that specific goal, track its progress and top up investments if you wish to reach the goal early.

To help investors plan for this important goal, PGIM India is launching the PGIM India Retirement Fund, which has a lock-in of 5 years or till retirement age (60 years), whichever is earlier.

The lock-in helps investors instil discipline and benefit from long-term compounding. This fund will invest in a diversified basket of securities across sectors and maintain a 25 per cent allocation each to large, mid and Small-Cap, respectively, offering investors to participate in each segment of the market. 

 *Investors should consult their financial advisers if they doubt whether the product suits them.

The Product labelling assigned during the NFO is based on an internal assessment of the scheme characteristics or model portfolio and the same may vary post-NFO when actual investments are made.

*Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.