How they build their retirement kitty

Three professionals who retired recently tell us how they have gone about the goal of financial security for a lifetime

“It feels like only yesterday that I reported for my first job. But decades have rolled by, and now, it’s time to call it a day,” remarked a friend recently.

Retirement brings to mind visions of leisure and relaxation but there’s the more pressing issue of financial security after one hangs up one’s boots.

People headed for retirement generally set store by their lumpsum retirement benefits. There are also those who invest early so they get a steady monthly income as retirement looms.

Portfolio spoke to three professionals who retired recently to know how they have gone about planning financial security for a lifetime. We also give our take on investing in an environment marked by rising inflation and expenses, and falling interest rates. Adding to the challenge is the increase in life expectancy.

Leaning on FDs

For a retiree, the fear of losing hard-earned money to inflation sends shivers down the spine. The increasing cost of living in a city erodes savings quickly unless one plans wisely.

Most retirees intend to invest, say, 50 to 60 per cent of their portfolio net worth after retirement in real estate, including the home they live in. The decision on how they invest the remaining cash surplus depends on how lumpy their retirement payments are. Fixed deposits seem to be the top choice in most cases.

Animesh Chatterjee (62), who received most of the payment at the beginning of retirement itself, says, “I have close to 60 per cent of my corpus in fixed deposits. Of the remaining, 30 per cent is in AAA and AA rated debt mutual funds while the rest is mostly invested in mid-cap equity mutual funds.”

How much retirees are drawn to the financial markets depends on their awareness of these instruments as well. Hariharan (61), a veteran stock investor since 1981, says, “I have close to 65 per cent of my portfolio invested in short-term deposits, around 5 to 6 per cent is in savings account. I do my own fundamental research and have allocated 25 per cent of my portfolio to equities. The balance around 10 per cent is invested in debt and equity mutual funds. Given my age and corpus, I consider a maximum investment cycle of five to six years in equity-related products.”

Of course, the allocations to a risky portfolio change drastically when both husband and wife receive a high proportion of their pension income as a monthly payout from a contributory pension fund.

Vijayakumar (61) says, “I have close to 70 per cent invested in long-term fixed deposits and 30 per cent in small and mid-cap equity mutual funds.”

Education goals, marriage

Generally, providing for children’s education and marriage expenses appears to be top priority for most retirees. “I save 40-50 per cent of the monthly income generated from my savings account, pension and dividends. With two of my three daughters already married, I don’t think marriage expense is a major concern for me,” says Hariharan.

“We are a small family of four, including my mother, my wife and my daughter. I intend to spend close to 50 per cent of my deposits and savings on my daughter’s marriage,” states Vijayakumar.

With a son who intends to go abroad for education and a daughter who is still pursuing her bachelor’s degree, Animesh keeps his options open when it comes to portfolio allocation.

“I intend to mortgage one of my two houses for my son’s education. I expect my mutual fund portfolio to double over the next seven to eight years. A portion of that should help fund my daughter’s marriage,” says Animesh

Though most of them have medical insurance that can cover maximum hospitalisation expenses of ₹8-10 lakh, re-balancing their portfolio beyond the age of 70 still needs better clarity in the midst of increasing market uncertainties.

“My wife and I are not averse to the stock market. As and when we get good returns, we will continue to invest. Mutual fund income is my only income other than pension income,” says Vijayakumar.

Animesh says, “I intend to sell my second property close to 10 years from now and use the amount received from that for future consumption.”

Our take

All three investors above should not consider the home they live in as part of their net worth or surpluses. They can consider selling or liquidating their second home to raise cash, but they need to hold on to at least one home to save on rent payout.

While all three are currently well placed on income (due to fixed deposits), it is not clear if they have budgeted for 25 or more years of retired life, which they should. All three seem to rely mainly on fixed deposits for regular income. But they need to budget for re-investment risk.

Deposits made in the last three years may yield 8 to 8.5 per cent annual interest. But as market rates tumble, they need to budget for lower income from deposits too. They must maximise investments in the Senior Citizen’s Savings Scheme from the post office which still yields over 9 per cent interest (taxable) to protect their income to some extent. They can rely to an extent on debt mutual funds, holding for three years and then using systematic withdrawal plans to regularly redeem units. This is more tax-efficient than fixed deposits. Vijayakumar’s plan to use up half his deposits/savings for a consumption need — his daughter’s wedding — may leave him short of a retirement corpus later. Same is the case with Animesh who wants to mortgage his home for his son’s education and daughter’s marriage.

Also, equity in portfolio post-retirement to beat inflation is good, but multi-cap equity funds would be a less volatile choice than mid or small-cap funds.

With inputs from Aarati Krishnan

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