What should be the strategy to invest your retirement funds
The investment strategy at each stage in life has to have different consideration and must change according to peculiar circumstance. For example a person at the initial stage of his career can take risks with his money and invest substantial portion of his savings in aggressive and risky assets like equity but not the one who has stopped earning as the risk taking ability almost diminishes to zero. After retirement the financial situation changes drastically due to stoppage of regular income while the expenses continue and rise as well. In this article I wish to discuss the strategy one has to follow for determining the composition of his investments. While strategising this you have to consider the following points and prepare your investment plan accordingly.
Since one does not have any income after retirement one has to maintain certain amount of liquidity preferably in saving bank accounts or liquid funds with instant redemption facility. This is needed to meet emergency like situations like medical emergency etc. If you have a credit card with good limit, this comes to you very handy in such situations. Even in case of medical emergency, all hospitals do not accept credit card or even cashless facility even if you have health insurance policy. So due to peculiar situation, you have to keep reasonable amount as liquid with you.
Regular income flow
The second aspect to be considered while deciding about composition of your investments at this stage is to take into account the requirement of regular income which you need regularly to meet your day today expenses. While assessing the money needed regularly you have to take into account not only the regular expenses but also the medical expenses which go up rapidly after retirement.
Growth of the investments
With increased life expectancy the risk of living longer has become a fact of life and therefore the period for which your retirement corpus should last has gone up substantially over the years. Though one cannot take risk with his investment after retirement but then risk and rewards go together. All the fixed income products will get you fixed return but will not ensure any growth to your investments. With inflation and taxes, the fixed income products do not get you decent returns in the long run. Retirement is not one post goal but a continuing gone. For ensuring growth of your investments you should invest in equity products. I am not advising you to invest in direct equity but one should invest part of the investment in the equity mutual fund products after taking care of liquidity requirement and regular monthly income.
What should be the ratio of investment in debt and equity and where one should invest the surplus left
The question is not so easy to answer as it seems. The answer would vary from person to person depending on various factors like whether you have any other source of regular income to supplement your monthly expenses. What is the risk taking ability of the person and any whether any other pending goals, in addition to the retirement, is still there.
Since retirement is not one post goal and lasts for an average 25-30 years, one should invest for growth after having provided for liquidity and regular income stream.
The asset allocation between debt and equity is a difficult question to answer but as a thumb rule 100 minus your age can be the component of equity in your portfolio. One should follow this pattern if one does not have any other regular income and is still have some risk taking ability.
For asset allocation the retired person should take into account only those assets which are yielding him any income. The residential house should not be taken into account. As most of the social responsibility of marriage of children would have been met and thus the gold invested for this purpose would have been appropriated. No more investments in gold is advised at this level.
Looking at the fact that the risk taking abilities comes down and yet one needs better returns for ensuring growth of the investments, investments in aggressive hybrid equity fund is suggested where the fund manager invests minimum of 65% in equity and the balance maximum of 35% in debt products to take care of volatility in the market. These funds are less volatile than other pure equity funds. Moreover for five year periods the aggressive hybrid funds as category has given better returns than large cap funds as category with lower volatility.
You should always keep sufficient money invested in products which giving regular returns for next five years at any given point of time. For this purpose you should replenish fixed income products every year from the growth yielding investments in mutual funds.
I even do not advise any investment in real estate. So we are left with equity and debt the ratio of which we have already discussed
The author is tax and investment exepert and can be reached at email@example.com and @jainbalwant on twitter.