Summary:
- Life expectancy is rising and interest rates are falling. In such an environment, prudent investment is needed for recently retired person.
- Depending on whether you are depending on pension or investment income for post-retirement expenses, different investment plans should be designed.
- As interest rates are falling, it is very important to include equity mutual funds for investments.
- To live a life of dignity, focus on your health, don’t depend on anyone else for your expenses and be aware of the options available before you.
- This article is based on what I feel could be a good strategy. This is not recommended strategy. You must contact a professional to design a strategy suitable for your specific circumstances. Have a great retired life.
Lot of people ask me how to plan for retirement? What is the best way to invest for retirement planning. Most people think that once you have retired, investing is not required anymore. Whatever money you have received on retirement, put it in fixed deposit or use it to buy plot of land or construct/renovate house. Now there are some changes happening. I will point to two very important changes that are happening right now. These changes make prudent investment after retirement all the more important.
Rising life expectancy and falling interest rate
In last few years, we have seen a very positive trend. Life expectancy in our country is increasing. Despite all the polluted air we breathe and stressful life we lead, we are expected to live a longer life. This is a global phenomenon. From Japan to Europe to US, everywhere people are expected to live a longer life. While this is very good thing, it is also creating various financial challenges. Hence, how you invest during retirement is becoming increasingly important for financial wellbeing. Hence, it becomes important to think about this and plan about it.
The second change that is happening is fall in interest rates. In developed countries, interest rates is very close to 0%. In our country, it is around 6 to 7%. As countries prosper and become more rich, it has been observed that interest rates fall. Now this is important for retirees. Retirees have historically parked their money in fixed deposits. Now, lower interest rates mean that interest income on such fixed deposits are falling first.
The above changes mean that people are living longer and hence they need more money. But getting more income from vanilla fixed deposits will be tougher in falling interest rate regime.
The most important things during retirement is to live a life of dignity and respect. If you spend your money on your kids or on other purposes and then depend on them for expenses, it will be a painful experience for you. I have seen many senior citizen spending their retirement proceeds on buying flat for their kids and then being made to feel unwanted in the very home they bought. So, DON’T MAKE THIS MISTAKE!
Best investment during retirement – your health!
Before going into details of investment strategy, lets focus on the most important aspect of retired life. Good health is the most desirable asset to have during retirement. Not only because it greatly enhances your quality of life, but also because it has financial implications. While life expectancy is increasing, quality of life is not increasing equally. What I mean here is that while we are living a longer life, this is often filled with lot of ailments. Due to the stresses of modern life, incidences of lifestyle diseases like diabetes, blood pressure, heart disease are also increasing at a rapid pace. As a retired person, the best gift you can give yourself and your family is to live a healthy lifestyle. This will not eliminate the health complications of retired life but certainly will reduce it. Every time, you avoid a visit to doctor, you are saving money. So, investing in good health should be the first and most important investment you should make before or after retirement.
Investing after retirement – important factors
How to invest after retirement depends on how a retired person is meeting his regular expenses. There are basically two scenarios:
- Pensioner meeting regular expenses through pension
- Non-pensioner person meeting regular expenses through income from investments.
In both cases, the general assumption is that the person who has just retired has some corpus of money that needs to be suitably invested.
Below is a broad roadmap of how to invest after retirement in each of the above scenario. We will discuss each of the above scenarios in following sections of the article.
How to invest for pensioner meeting regular expenses from his/her pension
This is a very happy situation and available mainly to retired government employees. Defined benefit pension in which your pension is linked to inflation and available for rest of your life is a great gift. This means that you can mostly meet your regular expenses from the pension. The PF/gratuity that you have received upon retiring is available for investment. During retirement, you have to provide for regular monthly expenses, medical expenses and other miscellaneous expenses incurred on travel.
How to invest for non-pensioner meeting regular expenses through income from investments
Here we need a bit of more nuanced approach. Given that there is no certain source of regular income, avoiding equity could prove to be very costly. However, equity is very volatile, so we need to impart stability to the portfolio. Basically, one should be free from worries about how to meet expenses in near future. So, one should look to invest predominantly in fixed deposits, debt mutual funds to taken care of their next 10 years’ worth of expenses. Anything in excess of this amount should be systematically invested in couple of multi-cap fund.
Other things to keep in mind
Always looks at taxes deducted at source. This can be seen by logging on to income tax department or also through your online bank account. From your fixed deposits to pensions, tax is deducted at source which may be higher than your applicable tax rate. So, check if you are not paying more taxes to the government.
One also has to keep some money for medical emergencies given the increasing expenses of medical treatment these days.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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