Portfolio Ideas. Retirees, continue investing

For many years, the argument that you invest during your working life and consume such investments during retirement has been right. However, this argument has been called to question in the recent past with important changes in the financial markets. In this article, we discuss why you have to continue investing even during your retirement.

In the new world, you may find it difficult to meet your post-retirement expenses with your normal investment portfolio; three factors can affect your cash flows during your retirement.

One, interest rates are declining steadily. If this trend continues, there could be a gap between the expected income from your portfolio and the actual income earned. This gap could be larger if sizable proportion of your investments is in interest-earning assets such as bank fixed deposits.

Two, you may argue that interest rates are softening as inflation is declining. That is not necessarily correct. You need money to meet your living expenses, leisure and healthcare costs during your retirement. True, inflation relating to living expenses may have come down marginally.

But your major outflow during retirement comes from the other two expense buckets — leisure and healthcare. You are likely to spend more on leisure activities. As you age, your healthcare costs are likely to go up as well. The inflation rate of leisure and heathcare is much more than the inflation relating to living expenses. So, you could still have a deficit. Three, the stock market has been highly volatile in recent years. It is a problem if you have sizable exposure to stocks in your portfolio. Why? Suppose you have ₹1 crore in your portfolio, consisting equally of stocks and bonds. Your equity portfolio declines 10 per cent due to stock market downturn. The issue is that, besides interest income, you have to fund your annual expenses using proceeds from selling equity.

But your portfolio has depreciated. Continual withdrawal from a depleted equity portfolio could expose you to longevity risk — the risk of running out of money during your lifetime.

You have to bridge the shortfall arising from the above factors by investing during your retirement. And if you already have a shortfall in your portfolio, how can you save and invest?

You could create a special contingency fund. This fund, including returns earned on the fund, will act as a buffer during your retired life. You should create this fund during the last 10 years of your working life when your income levels are peaking. This savings should necessarily be in bank deposits. Note that these deposits need not mature on your retirement date. Why? You do not need the special contingency fund unless you face shortfall in your investment account owing primarily to income deficit or unexpected inflation. So, you should maintain the special contingency fund as investment; even during your retirement.

Why not simply increase savings in your regular retirement account in the last 10 years of your working life? The reason is that any amount that is part of your regular account is likely to be consumed.

Use the special contingency fund only if there is a shortfall in investment. The unused portion of this will be part of your legacy portfolio — the wealth that you want to transfer to your children after your lifetime.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in