You may have retired recently or may be on the verge of retirement. If you retired recently, did you take the effort to consciously change the investments in your retirement portfolio? And if you are on the verge of retirement, are you aware that your retirement portfolio needs a complete makeover? In this article, we discuss why your portfolio has to change after your retire. We also suggest some investments you should consider to meet your post-retirement objectives.

Income Vs Growth

You save for your retirement during your working life. The objective of the retirement portfolio is, therefore, to accumulate wealth to sustain your post-retirement lifestyle. At retirement, this portfolio has different objective. It has to sustain your lifestyle post-retirement. In other words, this portfolio has to generate cash flows to replace your regular income. As you move towards your retirement years, you shift from a savings phase to a spending phase.

This essentially means that you cannot continue with the same investments in your retirement portfolio to meet your post-retirement needs. To differentiate the savings phase and the spending phase, your accumulating portfolio is called the retirement portfolio while the spending portfolio is called the retirement income portfolio.

Your retirement portfolio should contain significant equity investments to accumulate wealth. Your spending portfolio should contain significant income-generating assets to help you meet your monthly expenses.

There is another reason why your retirement income portfolio should be different from your retirement portfolio. While both portfolios are affected by losses, the consequences are different. If you incur losses in your retirement portfolio, you may have to consider postponing your retirement. But if you incur losses in your retirement income portfolio, chances are you will run out of money during your lifetime!

It is, therefore, important that you carefully choose the investments for your retirement income portfolio.

Stable life-income

Most of you accumulate wealth during your working life based on your life expectancy. But there is a strong possibility that you will live longer than the average people sharing similar characteristics. If you create your retirement income portfolio to match your life expectancy, there is a strong chance you will outlive your investments. Your objective is to reduce this risk. And you can do so by investing to earn lifetime income.

One investment that can reduce longevity risk (the risk of outliving your investments) is annuity. These are stable-income cash flow products sold by insurance companies. You have to pay a lump-sum price to buy the annuity. In return, the insurance company will promise to pay you a fixed sum of money every month till you live.

The problem is that annuities are not adjusted for inflation. So, even if an insurance company pays you Rs 25,000 every month for the rest of your life, the same amount received 10 years hence will not be sufficient to help you maintain a constant lifestyle.

Besides, you need sufficient money to meet your health-care costs. And health-care costs rise faster than general price level. You, therefore, need growth assets in your portfolio to address this problem. And that means equity investments, as expected returns are higher. A judicious combination of annuity and equity can help you create an easy-to-manage retirement income portfolio.

longevity insurance

You can buy annuity with or without return of purchase price. You can also consider longevity insurance. This is nothing but a deferred annuity that you can buy when you retire but which will pay you only after you turn 75. That way, you will receive large sums of money for relative smaller purchase price. Whatever investment you choose, remember this if nothing else: your retirement portfolio accumulates wealth while retirement income portfolio should generate cash flows to meet your spending needs. Invest accordingly.

(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investorlearning solutions. Feedback may be sent to >knowledge@thehindu.co.in )

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