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Retirement Income Planning – Advice Before Investing Windfall

Retirement marks a significant change in an individual’s life. It’s the end of one innings and the beginning of a new one. You no longer have to go to the office everyday and are free to pursue your passions, be it travel, music or reading. You may not receive a salary at the end of the month, but you can enjoy the fruits of your labour that are paid out to you as a windfall on retirement.

If you have had a long career as an employee, you are likely to receive a hefty lumpsumwith the following:

  • Employee provident fund
  • Gratuity
  • Pension
  • Leave encashment

The accumulated corpus could be quite significant. A well-thought-out retirement planning strategy can ensure that your golden years are indeed golden.

Every retired individual may have different needs. But some financial requirements may be common: you need a monthly income to manage your day-to-day expenses, you may often need larger amounts to fund travels or other major expenses and you will need funds to finance medical treatment etc.

If you allow your windfall to lie ideal or earn marginal interest, inflation and rising expenses will rapidly eat into it. You must invest it across avenues to ensure your needs are taken care of.

The market is filled with investment options. You may be tempted to invest in assets that give the highest return, but these may be risky. Other investments may be safe but illiquid or the returns may be low. Retirement planning is the art and science of making the right choices. That’s why we put together a 7-point checklist

Retirement planning: 7 things to keep in mind while investing your windfall:

1. Keep track of inflation and its impact on expenses:

Inflation can have a major impact on your expenses. What you are spending today on your day-to-day expenses will not be the same next year or five years down the line. It will be a lot more because prices will rise. You must not only account for your monthly expenses now but also for what it may be in time to come. Depending on your projections, you can invest a portion of your retirement earnings in an Immediate Annuity Plan that will give you a monthly pension. This monthly pension can be used to tide over day-to-day expenses.

2. Take a limited exposure to equities:

Equity is a risky asset to invest in. Returns are uncertain even for seasoned investors. It is not prudent to have a large exposure to equity during retirement. If you already have investments in equity, you can stay invested, and move your retirement corpus into safer assets. Equities are great to add a kicker to your returns, but overexposure can be risky. Banks offer special rates to senior citizens on fixed deposits with monthly credit of interest income. These could be safe bets.

3. Keep a medical or contingency fund:

Emergencies come without warning. And you may need access to money quickly in such a situation. While you must always keep some cash handy, a good idea would be to invest a portion of your corpus in liquid debt funds. Debt funds will give you better returns than a savings deposit and also the option to liquidate in a hurry without exit loads. They are also reasonably safe.

4. Make investments that ensure a regular flow of income:

Once you know your monthly expenses, you can divide your funds into different investments such that the cumulative income can meet your expenses. Many senior citizens find the Post Office Monthly Income Scheme or the Senior Citizen Saving Scheme a low-risk way to earn a consistent income. However, it is beneficial to invest some portion of your money in mutual funds that can grow your retirement capital to cover for inflation.

5. Don’t tie-up funds in illiquid assets:

During your retirement you want most of your funds to be as liquid as possible. It is best to not tie up your funds in long-term investments and assets that can’t be sold easily, like a house or property. Keeping money in assets that can be sold easily, for example, a mutual fund, will ensure you can meet your expenses and also grow your capital. Mutual funds have a systematic withdrawal plan where you can take out a certain component of your investment every month, and the rest of the investment will continue to earn and grow. Investing in such schemes will provide you income as well as liquidity.

6. Don’t take risks without adequate information:

It is easy to get swayed by opinions about the market especially when it is doing well. But investing without adequate knowledge is risky. For example, it may be tempting to invest in mid-cap stocks when they are booming. You will find many recommendations about stocks to buy. But unless a professional portfolio manager guides you, or you have the required expertise to study a stock, you should not invest your hard-earned money in risky avenues after retirement.

7. Study different investment options and create a customized retirement plan:

Managing your investments post-retirement is extremely important since the windfall funds must last you for an undetermined number of years. It is best to get professional advice on retirement planning. A professional can guide you in investing in a portfolio that comprises different assets classes and balances risk and return, and ensures your financial objectives are met.

Retirement is a golden period in your life. By being careful of your investments, you can make sure you enjoy it to the fullest.

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