Portfolio Ideas. Spending in the fall season

It is difficult to lead a comfortable retired life in the current investment environment. Interest rates on bank fixed deposits have been falling in the last few years. But post-retirement expenses have not. So, what should you do? In this article, we discuss the alternatives available for managing your spending needs in a low interest rate environment.

The income needed to fund your living expenses will be significantly affected in a low interest rate environment. Fortunately, you are unlikely to consume the same amount as living expenses every year through your retired life.

Specifically, the amount you need between age 60 and 75 would be much more than what you need after 75. So, you could consider consuming some amount of your fixed deposit capital every year till 75 in addition to the interest income you earn. Not all of you may be comfortable with this idea. After all, consuming too much capital could expose you to longevity risk — the risk that you will not have enough capital to fund your post-retirement expenses till you live.

Alternatively, you may have to cut back on some of your leisure spending and use the money to fund your living expenses.

In the hierarchy of spending, living expenses and health-care costs take priority over leisure, although you derive immense satisfaction from spending on leisure.

Fortunately, the investment account to fund your health-care costs may not be significantly impacted due to low interest rates. Why? Your health-care costs will be funded through a three-tier process.

The first tier is your emergency fund. The second tier is your medical insurance and the third tier is an all-equity portfolio. The third tier is only to fund major surgeries that are not covered by your medical insurance. The expected return on equity should come down with the decline in interest rates.

Nevertheless, your investment account can still fund the inflation-adjusted cost of major surgeries. How? Health-care costs are difficult to forecast. You may never have to undergo major surgeries during your retired life.

And that would mean the third tier of your health-care portfolio could well be used as legacy portfolio! But if you have to spend large sums on heath-care costs, at least the high expected return on equity helps.

Remember: health-care inflation is typically higher than general inflation and the interest you earn on deposits. Your optimal standby option in a low interest rate environment is your self-occupied house.

So, use reverse mortgage as a strategic option in your retirement income portfolio. During the initial years of your retirement, get reverse mortgage line of credit.

This is a facility that allows you to draw money from a bank under a reverse mortgage against your self-occupied house. The advantage is that you only have to borrow so much as to bridge the gap between the amount you require to meet your living expenses and the amount you earn on your monthly income fixed deposits.

You should not move away from bank fixed deposits to increase your investment income. Why? For one, you want to lead a stress-free retired life. That is, you should not worry about your investments losing value because of declining markets or corporate defaults. For another, you need monthly income to fund your living expenses. Therefore, investing in bond funds and corporate deposits may not be optimal.

So, your choice of products to fund your living expenses is really limited to joint lifetime annuity and monthly income bank deposits. Typically in India, fixed deposit rates are more attractive than annuity rates.

Therefore, in a low interest rate environment, you will be unable to increase your investment income. You should instead adjust your spending habits and get reverse mortgage line of credit to bridge the shortfall in your income to fund your living expenses.

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

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