How to make your retirement money last
One way of dealing with the issue is to divide your post-retirement years into two phases—the first will be 10-12 years, and then the remaining years.
Five years into retirement, Himanshu is a little worried if his savings will take care of his his and his wife’s needs for the rest of their lives. While he does not want to depend on his children, he is concerned about the rising cost of living. He is scared he may outlive his savings. He wonders if there’s any corrective steps he can take at this point.
Fortunately for him, Himanshu has recognised his problem early. One way of dealing with the issue is to divide his post-retirement years into two phases—the first 10 to 12 years and the remaining years. The first phase is when Himanshu can take a few measures to augment his income and grow his corpus. In the second stage, when age is not on his side, he could deploy the corpus to earn a steady income.
The corpus can be augmented in two ways. First, by seeking alternate employment and generating additional income. Larger the corpus, greater is its ability to generate income in the later years. Secondly, Himanshu should also recast his portfolio, which is currently purely in low return investments to include slightly high return investments that may carry marginally higher risk. A small exposure to equity through mutual funds will be suitable given his circumstances and will help the corpus to go further.
Himanshu will then have a larger portion of his corpus for the second phase of his retirement years when he is unlikely to be able to generate additional income. At this stage, it will be a good idea to use the corpus to buy an immediate annuity that covers him and his wife for life.
Insurance companies guarantee rates for life and will be able offer good rates given the age and life expectancy. Inflation adjusted annuities are also available where the payouts are linked to inflation indices. Annuity may be a better option for Himanshu rather than trying to manage his investments on his own to generate an income for life.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)