PremiumNEW DELHI: Post-retirement risk refers to a potential risk to financial security that one may experience after retiring. Reduced income, unexpected illness in the family, and rising inflation are all examples of post-retirement risks. In addition, an overall increase in life expectancy, or a sudden market drop could have a financial impact on your retirement plans.
While most of these exist while you are working as well, there are some concessions you can make to prepare for uncertainties later on in life:
Investing in inflation-beating instruments
What makes matters complicated is that everyone knows and is ready for a reduced income post retirement. However, most people don’t take into account inflation and unforeseen emergencies like medical conditions and sudden family emergencies. These are some of the risks that many people don’t calculate or plan for.
Even though many people may have a contingency plan in place, the question is - does the amount that you have in hand and the amount you need, match? Significantly higher medical costs can increase the risk of dipping into your retirement corpus. It’s important to find a way to overcome this.
Inflation is an important aspect of overcoming post-retirement risks. “Lifestyle inflation eats into the savings available for retirement, so you need to ensure that your investments grow at a faster rate than inflation. One rule of thumb suggests building a retirement nest of at least 25 times your annual expenses at the time of retirement," said Prateek Mehta, Co-Founder and CBO, Scripbox.
Creating a source of passive income
One of the ways to overcome this is by creating a source of passive income. Once an active salary ceases to exist, one can create passive income through dividends through their investments or annually they might get a yield from their investments.
Santosh Joseph, Founder and Managing Partner Germinate Investor Services LLP said, “If you can create a corpus large enough and if you can create an income coming out of your corpus without dipping into the corpus, then there seems to be a hedge i.e. you are living comfortably within the income your post-retirement corpus generates and if there is an emergency, you can dip into this. There again you can figure out a good mix of investments vis-a-vis risk and rewards so that you have growth, you have a passive income coming in and you are living well within the means of passive income."
Diversification in asset classes
One of the oldest rules of financial planning is diversification. A diversified approach in your retirement plan can help mitigate the risks that arise with market fluctuations. A good wealth manager can help you plan your asset allocation, based on your age and life stage. For instance, if you have started to build your nest egg at the age of 35, then your investments towards this corpus have roughly 25 years to grow. In such a scenario, allocate at least 50% of your savings towards retirement. Equity mutual funds and EPFs are great inflation-beating instruments. As you get closer to your retirement age, you can increase your investments in debt funds for more liquidity.
Mehta said, “Post-retirement, you should always have 5-7 years’ worth of expenses parked in liquid/ ultrashort funds. Maintaining 15-30% of your corpus in equity instruments is a must, depending on the stage of your life. This will ensure your standard of living is not compromised, even in your 80s and 90s. If you have family across the globe or if you anticipate material travel outside India, try to allocate about 5-10% of your investments in international equity. Reach out to an expert to help manage your specific requirements."
Importance of health insurance
One of the most important things to consider is health insurance or owning a house to avoid rent. “Ensure that you have your accommodation taken care of and that it is free of liability/EMI/Rent. Secondly, have a robust health insurance cover during your young and healthy years when you are earning. This insurance cover should help you even in your post-retirement years," said Joseph.
Besides, Mehta said, “Prolonged illnesses, medical bills or sudden changes in housing or marital status are all examples of post-retirement risks that one cannot foresee. Without appropriate insurance covers, these can hit you twice as hard. Understand that when you purchase insurance, you are essentially buying protection against such unforeseeable events that can potentially have an adverse impact on your family’s financial future. A good cover can help mitigate the financial uncertainties that may arise with such situations."
Thus, taking care of insurance, liabilities and other maintenance costs before you retire can help you manage your post-retirement crisis. Post-retirement crisis can be summarized as inefficient or insufficient planning. If you plan well or if you plan for more than what is required, you will always have a jolly retirement.
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