Smart Retirement Planning Is Not Just About Protecting Capital But Also Generating Income

There is a big change that individuals need to bring into their financial planning post-retirement.

Till retirement, the focus for them would have been to accumulate wealth for the purpose of building a large corpus, and this would require a certain strategy and asset allocation. After retirement, the goal has to be protecting the capital along with income generation so that it lasts for the entire lifetime and does not run out.

One of the main misconceptions relating to this is that protecting capital means only protecting debt and nothing else. This is not true, and here are some points that will determine the exposure to various assets.

The biggest worry for any person trying to ensure a payout for a long period of time is that the income has to keep pace with inflation.

Inflation in India has been muted in recent times, but it tends to spike suddenly. More importantly, while the headline inflation number might seem low, the individual inflation experienced by a person depends on their consumption and spending basket.

Thus, it is not surprising to find that most people find that earnings from debt will not be able to keep pace with the inflation numbers over a longer period of time without eating into their capital. This is why there is a need to have inflation-beating returns for a small part of the portfolio to boost the average overall return.

An individual can get complacent and come to believe that their corpus will take care of them for a long period of time.

This will be true only when the capital is not being used up when money is being used post-retirement. If the payout or the usage takes out a part of the capital, then the base on which the earnings are being made will keep dropping. This will result in a situation where the capital will start getting eroded quickly as time passes, which can lead to a crisis in the future.

This results in a situation where an individual, especially those who have just retired or have a long period of retirement ahead, needs to maintain some equity exposure in their portfolio. This need not be too much, but there has to be a small part of the portfolio, which can be up to 20% to 25%, so that it can benefit from the overall growth of the economy.

The equity exposure needs to have a reduced element of risk, and this can be done by choosing mutual funds and diversifying the portfolio, but this exposure is essential. Avoiding this and using only debt will lead to problems at a later date, by which time it might be too late to reverse the impact.

One of the factors that also needs to be considered by individuals is how they will replace debt with other investment choices. There are a lot of innovations and options that are now available, and these should be used so that they are part of the overall portfolio.

REITs, or Real Estate Investment Trusts, are a recent development in the Indian market, and these have specific features that include most of the income being paid out in the form of dividends. This makes it suitable for those who want a regular flow that is also growing steadily over a period of time.

The other thing is that having a part of the portfolio in options like gold will also ensure that diversification is built in and that the gains here also benefit the portfolio as a whole. The key point is to have the right mixture of these assets so that the overall portfolio returns are boosted.