Most retired people has this dilemma. The do not know how to invest their retirement fund. Retirement is that phase of life which is like a new world. After 35-40 years of service-life, it will be the first time when there will be no paychecks.
Psychologically this is dreadful for person who has recently retired. People get so used to and dependent on monthly paycheck’s that, when salary stops, they go in panic. No matter how big is their retirement fund, psychologically they cannot cope-up with paycheck-stopping.
To make this psychological turmoil even worst, people also has poor investment know-how. If people were more investment savvy, they will know that even without paycheck there are ways to generate stable monthly income. This is where the question comes, how to invest money after retirement?
Investment of retirement fund is essential. Otherwise a situation may arise where the retired person may run-out of cash. In old age, running out of cash can be very scary. So, how to invest money after retirement?
Young people who are in 20s can invest fearlessly. Middle aged who are in 30s/40s invest differently. People who are closer to retirement invests defensively. But how invest money after retirement?
For a retired person it is essential to build an investment portfolio considering that there is no paychecks coming-in anymore. Hence, a fixed source of income must be build. This can be done by investment.
Before one retires, 2 years in advance, retirement corpus verification is a must. After the verification, people will know if the accumulated retirement fund is sufficient or not. In case the fund is not sufficient, one can postpone ones retirement. But after one has retired, this flexibility is lost.
This article is for those people, who has retired and would like to know how to invest money after retirement.
Here, before proceeding, I would like to make an assumption that the person has not abruptly taken retirement. Means, retirement was a planned activity. In this back-drop, it is safe to assume that one has accumulated sufficient retirement fund.
Now the only question is, how to invest the retirement corpus?
People who ask this question are generally retired, salaried class people who have worked all their life for a company. They have only done job, but could not gather any investment expertise. For such people, it is very likely that they invest their retirement corpus wrongly.
Expectation of Returns.
So, what is the right way to invest the retirement corpus? To answer this question we have to dig deeper in the ‘expectation’ side first. The expected returns from the invested money should not be greater than 7% per annum. But why?
To earn higher returns the retired person must invest money in riskier options. For a retired person whose paycheck has stopped, should not take higher risks.
In India, expected return of 7% per annum provides a good balance between debt and equity. The investment portfolio will be loaded more on debt side. When portfolio is exposed more to debt, and minimally to equity, generating a consistent 7% per annum will be possible.
Annual Withdrawals & Growth.
If money is withdrawn too rapidly from the accumulated retirement fund, short-fall may occur. If one keeps everything locked and invested and withdraw only too-little, liquidity problems will emerge in day-to-day chores. So a balance must be maintained.
One would not like to consume all funds too quickly. But one must also maintain sufficient liquidity.
So what to do? How to invest money after retirement? We will discuss the specifics in this post later…
But till now, have we realized the concept of investing retirement fund?
The concept behind investing the retirement corpus wisely is to generate stable income by taking low risk and assuring minimum growth. Investment portfolio of a retired person must satisfy these three philosophies.
Finalize Monthly Budget.
Finalize a monthly budget before starting to invest the retirement fund. A retired person must know how much money is required each month to manage day-to-day chores.
A retired person must know exactly how much to be spent on each expense line items. These expense line items can be like grocery, utility bills, EMI’s, fees, entertainment, dinning out etc. A retired person must know the budgeted value of every line items. While budgeting one must categorize all line items between two parts: (a) Necessities & (b) Non-necessities.
Finalize Investment Strategy
Let the whole retirement fund be divided in two parts. Invest one part in fixed income securities. The returns generated from these fixed income securities should take care of ”budgeted necessities” of life.
Fixed income securities are pension scheme, fixed deposits, fixed income mutual funds, Post Office Monthly Income Plan, etc.
Invest the second part of retirement corpus in riskier options. The returns generated from these riskier securities should take care of ”budgeted non-necessities” of life.
Investment Portfolio of Retired Person
Retired person must not expose themselves to 100% equity. The portfolio must be heavier on debt and lighter on equity. This balance is a must. On an average, a retired person must not invest more than 30% in equity linked plans.
It is also essential to look for investment options that beats inflation after tax adjustment. Beating inflation (after tax) is not easy. Hence at times, people take a wrong decision of investing in options with longer lock-in periods to earn high returns. But this is not advisable for retired people. For retired people liquidity is a key.
Retired person must invest money in debt plans, its safe. But debt plans are also fail-safe. Hence, building a sufficiently big emergency fund is necessary.
So lets see, how to invest money after retirement…
Suppose a retired person has Rs.50,00,000 as his investment corpus as on today. Monthly expense budget of the retired person is say Rs.28,000 to 32,000 per month. How this retired person should invest his retirement corpus to manage his daily chores.
Before investing any money the retired person must separate out the following amounts from his retirement corpus:
(1) Emergency Fund = 6months x Rs.32,000 = Rs.1,92,000
(2) One Year Expense = 12months x Rs.32,000 = Rs.3,84,000
Keep the emergency fund locked in Fixed Deposit. Keep the next one year expense in high interest generating savings account.
After deducting these valves the balance left in retirement corpus is Rs.44,24,000.
Now divide the balance corpus as follows:
(1) 70% for debt plan = 70% of Rs.44,24,000 = Rs.31,00,000
(2) 30% for equity plan = 30% of Rs.44,24,000 = Rs.13,24,000
Invest the 70% corpus in Monthly Income Plans (MIP) offered by mutual fund companies. MIP’s can generate return close to 11% per annum. The portfolio composition of these MIP’s are 80% Debt, 15% Equity, 5% others.
Rs.31,00,000 x 11% per annum = Rs.28,416 Income per month
Invest the 30% corpus in Diversified Equity Mutual Funds for next 5 years. MIP’s can generate return close to 16% per annum. But remember to keep the invested for next 5 years.
Rs.13,24,000 x 16% per annum
This way the average return of the portfolio is close to 12.5% per annum. The advantage for retired person to have such a portfolio is double fold: (1) It generates stable income & (2) The return beats inflation.
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