No financial planning for your post retirement? Find out what you can do now!
Paying yourself first is sacrosanct when it comes to the personal finance landscape. This includes saving for retirement – a time when you would have stepped off the nine-to-five hamster wheel.
Sometimes, despite your best efforts and intentions, you may find yourself completely unprepared for situations in life that you very well knew would come to a pass. In India, where financial literacy has been mostly elusive for the majority of the population, this is the reality for many people when they finally cross the retirement milestone. What could have been the beginning of an absolutely-worry free and welcome escape from years of hustle and bustle becomes marred with worries of finances.
Paying yourself first is sacrosanct when it comes to the personal finance landscape. This includes saving for retirement – a time when you would have stepped off the nine-to-five hamster wheel. However, retirement planning is practically non-existent in India and most continue to depend on their children for support in their golden years,
The Mercer CFA Global Pension Index survey (MCGPI) released in 2021 ranks India’s pension system 40th out of 43 systems. Furthermore, the Indian system ranks lowest on the adequacy sub-index (which refers to the adequacy of the benefits provided). An August 2017 report of a committee on household finance set up by the Reserve Bank of India (RBI) revealed that by 2031, the population of people more than 65 years old was expected to grow the fastest (75%) among all age groups, yet only 23% were saving or planning to save for retirement in 2016.
Finding yourself financially unprepared for retirement can be painful. While you cannot turn the clock back to build a retirement fund, you can definitely secure your financial future to an extent even if you take the right approach to financial planning as soon as you retire. Manas Roy (name changed), retired two years ago after painstakingly building a shining career as an engineer at a PSU. “All through my younger years I remained complacent knowing that by virtue of being a government servant, my post-retirement years were automatically taken care of. That I was horrendously wrong only struck me when I retired. Agreed, that I received a handsome corpus on retiring and there was definitely no cause to feel a financial pinch. However, as months passed and when the pandemic struck, I realised my financial situation could have been so much better if I had rigorously invested for retirement in my younger days,” Roy rues.
Roy saw sense in the axiom ‘Better late than never’ and finally got around to investing for this leg of his life. “As is the case with so many people of my generation, when I received the lumpsum on retirement I immediately stashed them into fixed income instruments and also purchased real estate. After some time, I redrafted my financial strategy and channelized a chunk of that lumpsum amount into mutual funds. A few sessions with a financial advisor taught me that since I had fallen significantly behind in the retirement finances game, simply investing in fixed income instruments that were risk-free would be an equally bad mistake as not investing at all for retirement,” narrates Roy.
Roy shares that he took the hybrid mutual funds route. “These schemes re-balance equity exposure based on market valuation and reduce risk. As these schemes use arbitrage to manage equity exposure, the taxation is the same as equity funds,” he explains.
While Roy was one of the luckier ones who worked in government jobs and had a financial buffer ready for them on retirement, the situation is much worse for those who have worked in private jobs and are unprepared for retirement. Sushil Chaudhary (name changed) found himself in a similar situation three years ago when he retired. “The most worrisome thing was I did not have a reservoir of funds for retirement. It was unsettling to know that my income wouldn’t be the same and there was a real risk of my financial situation worsening,” reminisces Chaudhary.
Over the next three years, Chaudhary plunged himself into sorting out his finances and building a safety net for the rest of his life. “The first thing that I did was get rid of my debt liabilities. For this I first reached a ballpark figure of the amount of money I would need for my basic necessities, the amount of liquidity I needed to maintain and then started a plan to bring my debt liabilities to zero. There was no way I could build a successful portfolio of investments with my impacted income if I was burdened by loans and liabilities. Once I crossed that hurdle, I invested in a variety of mutual funds – with more leanings towards equities. The returns that my investment has generated are far better than the ones that I would have received if I had only invested in fixed income assets and I have been able to create a substantial corpus that has lessened my worries enormously.
Deepak Chhabria, CEO of Axiom Financial Services says, “Mutual funds offer many products that are suitable and can be effectively utilized by recently retired individuals. I suggest they should first exhaust their fixed income opportunities available like the senior citizen scheme and PMVVY – offered by LIC. The choice of the product will be determined by the individual’s risk taking ability, size of the retirement corpus and the need and size of the regular income expected.”
He further advises, “In the debt category, you can go for FMP’s [fixed maturity plans] and target maturity funds as they provide very tax efficient returns as unlike FD’s, here indexation is available and tax pay-out is significantly lower. Also, many of these schemes invest in government securities, state government papers and high quality PSUs and corporate bonds and thus the risk is substantially lower, as compared to pure corporate debt funds.”
Given that regular income after retirement can be a major cause for concern for retired individuals, Chhabria recommends systematic withdrawal plans offered by mutual funds. “The withdrawal provides regular cash flow and at the same time it is very tax efficient. After considering exit load and LTCG indexation, the net return can be significantly higher than the alternatives available,” he says.
-A DIY approach is best avoided if you haven’t planned for your retirement and have recently retired. Time may not be on your side and wasting it through hits and misses will worsen your situation.
- Ensure that you have adequate insurance coverage for yourself and your dependents. One exigency or a health crisis is enough to blow your financial plans to smithereens.
- Mutual funds offer many products that are suitable and can be effectively utilized by recently retired individuals.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.