The retirement planning can be roughly divided into three phases. The first is the 40-60-year phase. The primary task in this phase is corpus accumulation which should be accumulated aggressively. Equity investing is your key to capital appreciation. Maximise your equity exposure in the NPS; have SIPs in diversified mutual funds; invest in index funds. An amount 30 times your annual spend is a good thumb rule. An amount 30 times your annual spend is a good thumb rule.
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Investing in real estate
The first mistake we make at this stage is investing in property and hoping that the rent will help you in your retirement is a mistake. Managing an old property when you have aged is tough. Maintenance will add significant costs and rental yields will be low.
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Choosing conservative fixed income
The second mistake people often make at this stage is investing in fixed income products and choosing conservative investment options with their corpus. One should invest in equity and allow it to grow and appreciate. Choose funds and index over stock trading.In the 60-75-year phase, one is not going to use up all their corpus, nor should you plan to leave it untouched for heirs. Consolidate assets, including house(s) and gold, and decide how much you plan to use, and what you want to leave behind. Be kind to yourself. At this stage, one retires too so you must match your preretirement spend so that you are comfortable. What you need from your corpus, and assets, is a small, single-digit drawing. This should ideally be not more than 4-6% of your corpus each year. Invest a small portion in equity or growth assets. Invest it conservatively for a regular income. Periodically, move money from the untouched, appreciating equity growth bucket into the regular use, stable fixed income bucket.
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Don’t be a miser
At this stage, the third mistake people often make is to think that the corpus must remain untouched and subject to no risk. This one mistake has killed the quality of life of many retired investors. This is true only if you want to leave the entire corpus as bequest. Use what you have earned and saved for yourself. Bequest is the residual balance.
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Not factoring in inflation
The fourth rookie mistake retirees often make is to assume that fixed income from the corpus is adequate, and later finding that inflation hits hard. Without transfers from the growth portion, a fixed corpus will deplete. If you have the energy and ability to earn an income, do it for as long as you can, especially if your corpus was small because you saved less and invested conservatively. Don’t give up on earning an income too soon and too easily.
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Let a part of corpus grow
Lastly, investing the entire corpus conservatively out of fear. Interest rates run with inflation and are mostly lower than inflation rates for your specific basket of consumption. Let one portion appreciate and support you in fighting inflation. Investing 30% in equity is a good thumb rule.
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Plan to live longer
The third phase is the 75-year plus phase and many of us should plan for living beyond this age. Do not leave behind assets that are tough to transfer and manage. Sell off old properties and release the locked funds. You may not be able to use them now but make it easy to pass on.Simplify your life so you don’t have to manage too many assets, accounts and paperwork. Consolidate your investments and keep these easy to manage. One bank account, one demat account, and a few mutual fund portfolios is all you need. Take a decision on how your health care costs will be met. Decide how you will use your assets in your lifetime and make a Will. Complete all paperwork with respect to nominations and joint holdings. Keep it simple.(Uma Shashikant is the chairperson of Centre For Investment Education and Learning)
