Most savers put their savings in bank deposits, gold and real estate. A small portion of their assets may consist of equity shares, mutual funds, fixed income securities, etc. Would this kind of asset mix be sufficient to generate a sustainable income? In the second part of Moneylife Foundation’s two-part seminar on retirement planning, Debashis Basu, editor Moneylife, focused on how one can save efficiently and safely to meet one’s retirement needs. As much as creating a corpus is vital, sustaining it through the years post-retirement is equally crucial. Mr Basu explained to the members of Moneylife Foundation, what steps one could take to protect his/her corpus post-retirement, and the different options available in case of if there is a shortfall were also explained.
As explained in the first session, Mr Basu reiterated that “Retirement planning is very complicated because there are too many unknowns, many of which need to be assumed.” The significant and most important factor that would influence how much you are able to accumulate is where you invest. Out of the various factors that one can control and which one cannot, controlling how much you can save and where you invest can significantly influence your corpus. The least one should do, said Mr Basu, “is avoid the wrong products, save as much as possible, as early as possible and invest in products that create wealth.”
Through charts, Mr Basu explained to the audience how saving more and saving earlier could benefit one’s retirement corpus. How much returns different kinds of assets can generate were also explained to the audience. “The least you can do is invest in products that grow to beat inflation,” explained Mr Basu. For investing safely, one needs to understand the different products available and the risk and return associated.
An efficient mix of these assets can help create one’s nest egg. Lack of a well-planned savings plan can leave you with much less money to spend on yourself when you have no income. The basic purpose of investing for any goal and especially retirement is to be able to beat inflation. Stocks and equity funds over the long run of 5-10 years have more often than not beaten inflation. Other products like bank fixed deposits and other fixed income products may not deliver high returns but offer safety of capital.
The main factor that determines how you should go about saving for your retirement is your age. Mr Basu explained how over different age groups from 21 to 60 one can invest in a mix of products, taking into account the number of years to retirement. The younger you are the more time you have on your hand to generate long-term wealth. To use the power of compounding to the fullest one needs to invest in the right combination of products. The reason being, later on in life repayment of loans, expenses for child’s education, etc reduce you capacity to save. Therefore, the more you save early only benefits you in the long run.
“Post-retirement one’s main focus should be is to protect the corpus,” said Mr Basu. Here people have the option of immediate annuities, Senior Citizens Savings Scheme (SCSS) and MIP schemes, but none of these are great choices, explained Mr Basu. In the post-retirement period, it is important to choose safe assets, for which bank fixed deposits are the best. However, the main issue here is, one does not know the future returns and how long one would live. Investing in fixed income products for the very long term may turn out to be imprudent because they don’t beat inflation. Retirees may like to invest some amount of money in equity mutual funds.
Most savers have bulk of their investment in real estate. Mr Basu said, “Reverse mortgage is an option for them, but it has failed as a product in India and may pick up in near future.”
The session was followed by an engaging Q&A session. If you would like to be informed of many more such events in future become a Moneylife Foundation member. Click here to register. (Join Moneylife Foundation)