Transcript of the podcast, if you would like to read instead.

Jaya:

Welcome back to Kairos, a podcast on financial planning where we talk about doing the right thing at the right time. I have Susithra with me today to talk about retirement. We recently did a podcast on how most of the millennials today aspire to retire early, but in today’s episode, we are going to talk about the challenges typically faced by retirees during their post-retirement period.

Let’s get started. So, what are the challenges that are typically faced by individuals’ post-retirement?

Susithra:

Thanks for giving that background Jaya. Before we get into our topic I want to share some numbers from a recent study conducted on “Retirement Readiness by PGIM”.

          • 89% of respondents feel unprepared for retirement and they do no have any alternate source of income
          • Barely 1 out of 5 Indians consider inflation while planning for retirement
          • 51% of the respondents had not made any financial plans for retirement

These numbers clearly show that most individuals are clearly not prepared for retirement. They either depend on their family for financial support or assume that employer provided retirement benefits such as provident funds and gratuity will be sufficient to meet their retirement needs.

With this background in place, we will now explore typical challenges faced by retirees.

      1. Inflation: Well, this one is a no-brainer. Anyone who has gone grocery shopping will clearly understand the effect inflation has on purchasing power. As we speak, inflation is in the range of 5.5% – 6%. This means in approximately 12 years time your expenses will double. If we assume the average human life to last till 85 years and the normal retirement age to be 60, then by the time someone turns 80, their monthly expenses would have grown by 2 times. As it is evident from the survey, most individuals do not factor in inflation while building their retirement corpus.
      2. Medical Expenses: Hospital expenses are on the rise and this becomes a major contributor to post-retirement expenses. Most retirees depend on their health insurance cover to take care of any such expenses, but what they fail to understand is that health insurance covers only hospitalization expenses and any expenses incurred for a doctor visits or buying medicines are not covered. Most retirees do not plan for a separate medical reserve corpus while planning for retirement, and this becomes a challenge for them post-retirement.
      3. Contingency Reserve: Maintaining a separate reserve for contingencies is crucial for everyone. But it becomes more important for retirees to maintain a surplus contingency reserve, as they will not have a recurring income stream apart from their pension income post-retirement and it becomes difficult to replenish the contingency reserve.

Jaya:

Rightly said. Also, retirees can consider maintaining a separate reserve for replacing their appliance/vehicle/remodelling house/travel-related expenses etc. Thinking about these things in advance makes it easier to plan for them and it will not leave a dent in their actual retirement corpus.

We covered lifestyle-related challenges, can you throw some light on investment options available to plan for retirement?

Susithra:

Sure. Choosing one investment option becomes very important for achieving any financial goal. Retirement being a long-term goal needs special attention while choosing investments. Let’s cover some basic options available in the market for retirement.

          • Employees’ Provident Fund (EPF): This is one of the major contributors to the retirement corpus for a salaried individual. As most of the employers provide EPF benefits to their employees and employer will also contribute up to 12% of basic salary into this fund. The advantage of EPF is that it provides a fixed rate of return (currently 8.5% p.a.) and provides tax benefits during both the contribution period and during withdrawal. Contribution from the employer also adds to the corpus, and since this gets deducted from the salary directly there is a discipline of systematic investment. Employees also have an option to make a voluntary contributions (VPF) to their provident fund.
          • Public Provident Fund (PPF): PPF is also regulated by EPFO, and it provides an opportunity for non-salaried individuals to build a provident fund corpus focused on retirement. Though the contribution, in this case, is only from the individual, even PPF offers tax benefits similar to EPF. Usually, the rate of interest on PPF is lower than that of EPF (currently 7.1% p.a.) and it has a lock-in period of 15 years.
          • National Pension Scheme (NPS): This is a new scheme introduced by the government targeted towards building a retirement corpus. There are various investment options available under NPS such as equity, government debt, and corporate debt. NPS does not guarantee a fixed rate of return, instead, the rate of return depends on the type of investment that an individual opts for under this scheme. NPS gives equity exposure, and since this is held for the long term one can expect decent returns from their portfolio. But, NPS mandates at least 40% of the corpus to be converted into an annuity at the time of withdrawal.

Apart from the above said products which are offered by government, individuals can also invest in equity related instruments and mutual funds while saving towards retirement. One has to be careful about the asset allocation strategy they follow while planning for retirement. Individuals has to follow a dynamic asset allocation strategy which is in line with their risk profile. Even during the post-retirement period, a small portion of the portfolio must be allocated to equity which will act as inflation hedge.

Jaya:

Agree with you on the importance of asset allocation in one’s retirement portfolio. As you said, it has to be in line with risk profile and managed dynamically. Typically a higher exposure to equity is recommended during the accumulation stage and this can be gradually reduced to a small portion as one moves closer towards retirement.

So, what is the ideal way to plan for withdrawal from this corpus? There are annuity products provided by insurance companies and there is also SWP option available in mutual funds.

Susithra:

Withdrawal pattern also has an impact on retirement corpus and how long it will sustain. So, lets explore both annuity and SWP option available.

          • Annuity: This is similar to erstwhile pension provided by employers to their retired employees. Annuity offers a stream of income based on the initial investment that you make. There are different types of annuities which cover individual/along with spouse, fixed vs variable annuity, annuity adjusted for inflation, with return of premium option, etc. One thing to keep in mind while choosing an annuity is that though it offers a regular stream of income, fixed annuity does not provide inflation adjusted income. This will have an impact on post retirement purchasing power.
          • SWP: Systematic withdrawal plan lets an individual make systematic withdrawal from one’s mutual fund portfolio. The frequency and the value of withdrawal can be adjusted depending on individual’s requirement. This offers flexibility post-retirement, as retirees can withdraw required amount based on the existing inflation.

One can augment their fixed income stream such as regular pension/rental income/annuity with a SWP to meet inflation adjusted income.

Jaya:

Well, I believe we covered retirement planning in detail in today’s episode. To summarize

      1. Inflation must be factored in while planning for retirement corpus.
      2. It is beneficial to maintain separate reserve for contingencies, medical emergencies, and appliances/other miscellaneous expenses.
      3. Follow a dynamic asset allocation strategy while planning for retirement in line with risk profile. Maintain some portion of equity as a part of post-retirement portfolio to beat inflation.
      4. Follow a SWP option to withdraw funds from the accumulated corpus.
      5. Have a financial plan in place. This will give a realistic picture of when you can retire and will help you track your progress.
      6. That’s it from our end.
      7. If you enjoyed listening to this episode, please share it with your friends! Thanks for tuning in, see you next month.

That’s it from our end.

If you enjoyed listening to this episode, please share it with your friends! Thanks for tuning in, see you next month.

Reference: https://www.pgimindiamf.com/retirement-survey#surveyHighlight

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