Mobility paves Samsung’s silver path
The Korean giant’s early bet on mobile phones helped it hit the $10-bn mark in India, but in its 25th year it ...
After years of accumulating wealth in your retirement portfolio, you are now ready to enjoy a comfortable retired life. Yet, you also want to leave some wealth for your children. What should you do if you do not have enough capital to achieve both goals? In this article, we discuss how you can create a retirement income portfolio that not only takes care of your post-retirement living but also enables you to transfer enough money to your children after your lifetime.
As you approach retirement, your association with wealth changes. Realising that you will no longer have active income, you tend to become very conservative with your investments. Also, spending does not come easily after retirement.
So, what should you do with all the accumulated wealth in your retirement portfolio? You have to sell your investments and create another portfolio to sustain a comfortable post-retirement living.
You have two choices. One, you can create a stock-bond portfolio with more allocation to bonds. This would mean you have to sell some of your equity investments every year because your interest income may not be enough to meet all your post-retirement expenses.
But such a portfolio poses several issues. What if the stock market continually declines and you still withdraw money from this portfolio? You may soon run out of money. This is called the longevity risk — that you may outlive your investments. Then, there is the related issue of financial anxiety. Each time you sell your equity investments, you are bound to become anxious about whether your investment will sustain for long.
Your second choice is to create a retirement income portfolio that is custom-tailored to take into consideration all aspects of your post-retirement living. You will incur three important types of expenses after your retirement — monthly living expenses, leisure and health care costs.
In this article, we will focus on your monthly expenses because you have to incur it throughout your retired life, quite unlike the other two. The advantage with the second choice is that your retirement income portfolio can also become your legacy portfolio. How?
Your objective then is to create a portfolio that will give you a steady stream of income every month during your retired life to substitute for your active income. Because you consume only the income, the capital required to generate this steady stream of income is also your legacy portfolio.
The easiest way to set up this portfolio is to invest in a monthly income deposit with banks. Your initial capital will depend on the income that you require every month to sustain your living expenses. You are, of course, exposed to two risks. One, if inflation increases, your monthly income may not be enough to sustain your living expenses. Two, if interest rates decline at the time you renew your deposits, you will have lower income than required. You are exposed to this risk (called reinvestment risk) because your post-retirement years (typically, 25 years) will be longer than the longest maturity that banks typically offer on their deposits (typically, 10 years).
But the important point is that your monthly expenses will most likely reduce after age 75. So, if your investment in a monthly income fixed deposit earns ₹80,000 per month through your retired life, you may not, perhaps, require that amount after you turn 75. Some part of your inflation risk and reinvestment risk is, therefore, cushioned by the declining spending curve after 75.
After your lifetime, the bank deposit will transfer to your children as legacy portfolio. So, remember to have them as your nominees when you create the deposit. Using deposits to transfer wealth is not the only way to create a legacy portfolio. Remember, this is an optimal solution if you do not have enough capital at retirement to set up a separate legacy portfolio.
The writer is founder of Navera Consulting. Send your feedback to portfolioideas@thehindu.co.in
The Korean giant’s early bet on mobile phones helped it hit the $10-bn mark in India, but in its 25th year it ...
Antrix should adopt a different tactic than merely fighting over jurisdiction: Experts
Invest in relationships, enterprise, behaviour, effort and learning
From different types of osmoses to new membranes, researchers have come up with ways of drawing water
Will a stock continue its current trend or will it reverse? We tell you how you can read chart patterns to ...
₹1483 • HDFC Bank S1S2R1R2COMMENT 1465145015001510 Fresh short positions can be initiated with stop-loss at ...
Bucking the overall market trend, the stock of Capri Global Capital Limited (CGCL) gained on Monday and ...
Most AMCs have been sending out cryptic e-mails. We tell you how to read between the lines
In these isolated times when people yearn for a slice of the familiar, amateur and professional chefs are ...
On the eve of his 86th birthday, a peek into an interview-based book that reveals the actor’s many moods, ...
Forget the tuna. The island nation will keep you full and happy with coconut, koftas and jasmine
This year, on Facebook, I saw that someone had posted a list of EASY RESOLUTIONS. I didn’t copy them down but ...
Digital is becoming dominant media, but are companies and their ad agencies transforming fast enough to make a ...
Slow Network, promoted by journalist-lyricist Neelesh Misra, pushes rural products and experiences
How marketers can use the traditional exchange of festive wishes meaningfully
For Fortune, a brand celebrating its 20th anniversary, it was a rude shock to become the butt of social media ...
Three years after its inception, compliance with GST procedures remains a headache for exporters, job workers ...
Corporate social responsibility (CSR) initiatives of companies are altering the prospects for wooden toys of ...
Aequs Aerospace to create space for large-scale manufacture of toys at Koppal
And it has every reason to smile. Covid-19 has triggered a consumer shift towards branded products as ...
Please Email the Editor