Mumbai - With rising life span, it has become a necessity for retired persons to do proper financial planning to lead a successful post retirement life. And, to achieve this objective, wealth preservation should not be the only agenda for retirees. Rather, one should generate returns higher than the current inflation rate to take care of healthcare, lifestyle and other general expenses.
In this perspective, a retiree should not be too conservative in his money management principles. According to financial advisors, going long on debt instruments will surely fail to meet the objective of generating inflation beating returns. Therefore, it is imperative to have the right mix of debt and equity to get good return on investments.
Don’t shun equity
Generally, it is perceived that retired people should stay away from any risky financial instrument to preserve wealth. However, equity as an asset class has the potential to give post tax return higher than most fixed maturity products. Also, choice of right kind of equity product ensures good returns with capital preservation.
“With increase in life span of individuals, a retired person should prepare financial planning for 20-25 years post retirement. So, it will be impossible to beat inflation without putting some money in equities,” Dwijendra Srivastava, Chief Investment Officer- Debt of Sundaram Mutual Fund told The Finapolis on Thursday.
While investment pattern in equities will differ from person to person, share ranging from 10-30% of total corpus should be put in equity linked instruments.
“Equity investment pattern will depend on consumption habit of the individual. If consumption is low, equity investment percentage can be low. However, if it is high, one should consider investing higher amount in equities to take care of expenses,” Srivastava said.
Similarly, equity investment would depend on the risk profile of the individual. Generally, the golden rule of '100 minus age' is followed for investing in equities. However, this will vary depending on the risk appetite of the retired person.
Quick access to cash
Another important aspect for a retired person is to maintain enough liquidity to meet any exigencies like a health issue or other social obligations. Typically, retired individuals park their money in savings bank accounts with very less interest earnings. It’s better to park the money in short-term mutual fund products in debt and equity space, which will meet the need for liquidity when needed. Tax efficiency should be considered while parking the money in various financial instruments.
Apart from equity and debt fund products in mutual fund space, other financial instruments can be explored for earning good returns on investment with preservation of wealth. For example, annuity schemes are very popular products available in the market, which provide a stream of income at regular intervals. Usually, the individual invests a lump sum and gets regular income till maturity or till death. “The option of investing in annuity products can be explored as they take care of your consumption needs with regular inflow. However, chances of beating inflation are low in case of these instruments. Investment in tax-free bonds issued by various firms can also be explored depending on the investment time horizon. Typically, the post-tax return is better than normal bank savings instruments.