The recently published sixth edition of Axis Max Life Insurance\u2019s annual Bharosa Talks India Retirement Index Study (IRIS 6.0) points to a significant gap in retirement savings. Urban Indians have accumulated only 28 per cent of their target retirement corpus on average. Only 11 per cent believe their corpus will last their lifetime, while 39 per cent fear it may not last even five years. While those still working need to save more, retirees must manage their corpus more prudently.\u00a0<\/p>\n
Ideal corpus, withdrawal rate\u00a0<\/p>\n
The appropriate corpus depends on family size and retirement expenses. Financial planners regard 30\u201335 times expected annual expenses at retirement as a useful benchmark.\u00a0<\/p>\n
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\u201cIf the corpus is below this benchmark, the retiree may need to control expenses or earn better portfolio returns,\u201d says Deepesh Raghaw, Securities and Exchange Board of India (Sebi)-registered investment adviser.\u00a0<\/p>\n
Western retirement literature often cites 4 per cent as the appropriate annual withdrawal rate. \u201cIndian data supports a rate closer to 2.5 to 3 per cent,\u201d says Vishal Dhawan, chief executive officer (CEO) and founder, Plan Ahead Wealth Advisors.<\/p>\n
Raghaw adds that a withdrawal rate above 3 per cent can become problematic, particularly for people retiring between ages 45 and 60.\u00a0\u00a0<\/p>\n
How much a retiree can withdraw from the corpus also depends on whether they want to exhaust the principal or pass on a legacy. \u201cA retiree who only wants the corpus to last for their lifetime may withdraw both investment earnings and part of the principal. Someone who wants to keep the corpus intact should withdraw only the earnings,\u201d says Arnav Pandya, founder, Moneyeduschool.\u00a0<\/p>\n
Supplementary income sources like rent can reduce the amount withdrawn from the retirement corpus.\u00a0<\/p>\n
Use time-based buckets\u00a0<\/p>\n
While setting up the retirement portfolio, retirees can divide the total amount into buckets based on when the money will be needed. Keep funds required over the next one to three years in the first bucket. \u201cInvest this bucket in very safe instruments to insulate it from volatility,\u201d says Dhawan.\u00a0<\/p>\n
The second bucket should meet needs arising roughly four to 10 years later. \u201cIt may hold longer-term debt assets and a small allocation to hybrid assets,\u201d says Dhawan.\u00a0<\/p>\n
Use a third bucket for needs arising after 10 years. \u201cThe longer horizon permits a more aggressive allocation. This bucket may include index funds and actively managed flexicap or multicap funds,\u201d says Dhawan.\u00a0<\/p>\n
Choosing right asset allocation\u00a0<\/p>\n
The allocation to risky assets such as equity and gold should reflect the retiree\u2019s risk profile. Corpus size is another key consideration. \u201cA person with a large corpus who can meet expenses with a 30 to 40 per cent allocation to risky assets need not take additional risk,\u201d says Raghaw.\u00a0<\/p>\n
Corpus size can also influence equity allocation in the other direction. \u201cA larger corpus permits a somewhat higher equity allocation,\u201d says Pandya.\u00a0<\/p>\n
The entire corpus should not be put into debt once a person crosses 60. \u201cMaintain some exposure to risky assets because inflation can severely erode the value of the corpus,\u201d says Raghaw.\u00a0<\/p>\n
Broadly, a person may allocate about 60\u201370 per cent to income-generating assets. \u201cThe remaining 30 to 40 per cent can help the portfolio keep pace with inflation after retirement,\u201d says Dhawan. Those with a lower risk tolerance should invest more conservatively.\u00a0<\/p>\n
Use the right products\u00a0<\/p>\n
Retirees should allocate enough to income-generating instruments to meet their cash-flow needs. The choice of fixed-income instruments depends, among other factors, on the retiree\u2019s age.\u00a0<\/p>\n
\u201cYounger retirees may use debt mutual funds and equity arbitrage funds which are more tax-efficient,\u201d says Dhawan.<\/p>\n
Older retirees may use products designed for senior citizens like the Senior Citizens\u2019 Savings Scheme (SCSS), which pays an 8.2 per cent annual rate of interest. They may also use bank or corporate deposits that offer higher interest rates to senior citizens. Reserve Bank of India (RBI) floating-rate bonds (8.05 per cent annual interest rate) are another option.\u00a0<\/p>\n
\u201cAn annuity plan can be useful when purchased at an appropriate age,\u201d says Raghaw. Annuities bought at an older age give higher returns.\u00a0<\/p>\n
A systematic withdrawal plan (SWP) can also be used to generate cash flow. \u201cUse an SWP from a debt fund rather than an equity fund. An SWP from an equity fund can damage the portfolio,\u201d says Raghaw.\u00a0<\/p>\n
Equity index funds, exchange-traded funds, flexicap funds, multicap funds and aggressive hybrid funds can provide growth exposure. \u201cGold can deliver reasonable long-term returns but can also be highly volatile at times,\u201d says Dhawan.\u00a0<\/p>\n
Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) can provide both growth and income.\u00a0<\/p>\n
Common mistakes\u00a0<\/p>\n
Retirees often underestimate life expectancy and plan only until age 70 or 75. With lifespans increasing, they should plan for a lifespan of 85 or 90 years.\u00a0<\/p>\n
Some retirees also become overly conservative. \u201cExcessive conservatism can leave a portfolio vulnerable to inflation risk,\u201d says Raghaw.\u00a0<\/p>\n
At the other extreme, retirees with an inadequate corpus take excessive risk to narrow the shortfall. \u201cRisk can produce higher returns but can also destroy capital,\u201d says Raghaw.\u00a0<\/p>\n
In the case of seniors with a large corpus, excessive spending in the early years can prove costly. \u201cEarly retirees may still face major expenses such as children\u2019s education, marriage or home purchase. Drawing excessively from the retirement portfolio for these expenses can be risky,\u201d says Dhawan.\u00a0<\/p>\n
The retirement corpus should be adequately liquid. Using too much of the corpus to buy property for rental income can block capital and leave seniors short of liquidity.\u00a0<\/p>\n
Finally, retirees should not assume that returns available at retirement will continue indefinitely. \u201cIdeally, a person should aim to preserve the corpus and meet withdrawals from its earnings. Drawing down the corpus can cause retirees to run out of money in their 70s or early 80s,\u201d says Pandya.<\/p>\n
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\u00a0Maintain emergency corpus<\/p>\n
\u2022\u00a0 \u00a0 Corpus size for elderly depends on health condition, ailments, family responsibilities, size of health insurance policy<\/p>\n
\u2022\u00a0 \u00a0 Should be enough to cover medical emergencies<\/p>\n
\u2022\u00a0 \u00a0 Some hospitals may not offer cashless\u00a0\u00a0<\/p>\n
\u2022\u00a0 \u00a0 May need to pay medical bills, claim reimbursement later<\/p>\n
\u2022\u00a0 \u00a0 Metro residents may need bigger corpus as medical costs tend to be higher there<\/p>\n
\u2022\u00a0 \u00a0 Keep at least 12 months\u2019 expenses in liquid instruments like FDs and liquid funds<\/p>\n","protected":false},"excerpt":{"rendered":"The recently published sixth edition of Axis Max Life Insurance\u2019s annual Bharosa Talks India Retirement Index Study (IRIS…\n","protected":false},"author":2,"featured_media":606436,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[10266,138,246,298777,111,139,69,244,245,59096,19422,2532,116634,4657,298778,202027,298779,59098],"class_list":["post-606435","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-asset-allocation","tag-business","tag-finance","tag-inflation-risk","tag-new-zealand","tag-newzealand","tag-nz","tag-personal-finance","tag-personalfinance","tag-retirement-corpus","tag-retirement-income","tag-retirement-planning","tag-retirement-planning-india","tag-retirement-savings","tag-retirement-withdrawal-rate","tag-scss","tag-senior-citizen-investments","tag-swp"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/606435","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=606435"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/606435\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/606436"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=606435"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=606435"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=606435"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}