All of us work hard to balance our current and future consumption. Our active income stops when we retire.

So, the money we invest during our working life should support our retirement living. This is possible if we withdraw systematically from our investment portfolio for consumption purposes during our retired life.

And that brings up a question. Should retirees invest during their retirement or should they only consume? It depends on their lifestyle requirement and shortfall in the portfolio.

When to invest Retirement is all about consumption of existing wealth. So, why bother about investing in your retired life? The reason is two-fold.

The first factor has to do with shortfall in desired cash flows. This could happen when inflation is rising and you need more income to maintain your existing lifestyle.

Or then, you may have miscalculated your retirement expenses, especially healthcare, where actuals are much more than what you expected.

In such cases, you may have to invest to improve your portfolio cash flows in later years.

The second factor has to do with the sequence of returns risk (SORR).

Briefly, SORR is the risk that the order of the returns-experience can affect your portfolio value. This could happen when you have a stock-bond portfolio to support your retirement expenses.

You should sell equity every year to generate the required cash flow to sustain your post-retirement lifestyle. But what if the market declines in any year?

You could deplete your portfolio value if you withdraw money for consumption in a year when the equity market declines.

This could lead to longevity risk — the risk that you will outlive your investments! You should, hence, invest to moderate longevity risk, that arises due to SORR.

So, what kind of investments should you make in your retired life?

How to invest We list below the different kinds of investments that you may consider during your retired life.

If you are a taxable investor, you could consider tax-free bonds to improve the cash flows on your investments.

Tax-free bonds enable you to increase your post-tax returns with low credit risk.

How? Your interest income is tax-exempt. Besides, these bonds are issued by Government enterprises and companies whose credit risk is typically lower than non-Government companies.

If you depend on a stock-bond portfolio to meet your retirement expenses, you should invest in index funds through rupee cost averaging approach.

That is, instead of making a lumpsum investment at any point in time, you could spread your investments over three-six months.

This approach moderates regret bias — the regret that you will suffer from either choosing a wrong active fund or buying it at a wrong time.

If you have fixed deposits to fund your living expenses, your fresh investment should primarily be in the renewal of such fixed deposits at maturity. You should follow the break-even rule.

Briefly, this rule enables you to reduce your risk of renewing your fixed deposits at a lower interest rate. Finally, if you depend on rental income to support your post-retirement living, you may have to invest continually on the upkeep of your property to earn market rentals.

In general, retirement is the time when you should consume your cash flows.

So, you should not invest because you find a good opportunity, unless your investment objective is to transfer wealth to your children.

Otherwise, you should invest during your retired life only if you face an income shortfall because of high inflation, higher-than-expected expenses or SORR.

(The writer is the founder of Navera Consulting. )

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