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HindustanTimes Mon,22 Sep 2014

How to balance risk and returns in the post-retirement phase

Dhirendra Kumar, Hindustan Times  New Delhi, December 02, 2012
First Published: 21:14 IST(2/12/2012) | Last Updated: 22:30 IST(2/12/2012)

The conventional wisdom of equity not being suitable for retirees is not just misguided, but downright dangerous.

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A few days ago, I came across a retiree planning his post-retirement finances. In comparison to the usual fixed-income attitude that people have at this stage, this person had a refreshingly well-thought view. He said that most financial advisors had recommended that at this point in life, all his money should be in fixed-income assets. But in his opinion, since the post-retirement phase could last for twenty, thirty or more years, equity was the better bet.

Few will agree to this, but he’s absolutely right. The general advice about sticking to fixed income deposits of various kinds as being the only safe option for retirees — because equity is too risky — is simply wrong. And, it’s not just wrong, but utterly misguided as well, and a senior citizen who follows it is headed for financial disaster.

Unless you have an independent source of income like rent, that is inherently inflation-adjusted, you are doomed to old-age poverty. Interest on deposits will not keep up with inflation and the money you withdraw for expenses will relentlessly eat into the real value of your nest egg. And with equity? Let’s take a realistic example. Suppose you retired in the early 1980s with a kitty of Rs. 5 lakh that you had invested in a hypothetical investment tracking the Sensex. Let’s say your monthly expenses were Rs. 3,000, and grew 10% a year.

After 32 years, your monthly expenses would be Rs. 63,000. Not only would you have no trouble funding expenses, your principal would have grown to Rs. 2.7 crore! The risk? Over the years, the investment would have faced steep declines in 1987, 1992, 2001 and 2008 and taken them in its stride. The lesson is clear — if retirees want to spend their twilight years prosperously, equity is their only hope.


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