Lifestyle, priorities, responsibilities and financial changes are very significant for anyone post retirement and have to be dealt in the best possible way.
The financial needs that most of us have post retirement are generating decent income at regular intervals as well as good capital appreciation. Our major understanding regarding the financial needs is to manage the retirement fund actively with a hybrid solution (income generation and capital appreciation).
The key aspects of any retirement fund should be a healthy income stream without taking the risk of capital erosion and to beat inflation so that the actual portfolio size does not get eaten up by it.
Let us look at the available options for deploying any retirement fund and see their pros and cons. Like any other evaluation, we will be looking at a few metrics or aspects of investments to evaluate and compare them with each other. The aspects I prefer to look at are: Return Potential, Practical Risk, Inflation shield, Liquidity, Flexibility (to change investments), Transparency.
The available practical investment options that have income streams as well as capital appreciation potential are:
- Real Estate (residential or commercial)
- The rental yields have been very low in India with an imbalance between growing rate of landlords against growing rate of tenants which makes it less attractive income wise but that can be compensated with it being one of the high performing assets in non-ultra-metropolitan markets in India.
- Real Estate has high return potential and is a natural inflation shield but has very low and near to zero liquidity, flexibility and comes with a lot of practical risk like maintenance, market risk which is not so preferable in a post-retirement life.
- Insurance (Linked and Non-Linked)
- These are the least preferred investment options by us as they are high cost (huge commissions), have limited return potential (sometimes due to high costs). Any insurance’s main purpose should technically be protection rather than an investment.
- Insurance has neither great investment potential nor liquidity or transparency. It might beat inflation but is not guaranteed always due to the high cost / underlying investment structure. The lack of liquidity has impacted many investors in a very negative way.
- Fixed / Recurring / Bank / Government Deposits
- These investments have the least possible near zero capital risk. Any bank FD has a five-lakh insurance cover and government deposits like Sukhanya samriddhi or National Savings certificates have a strong backing from the government.
- They have a very weak inflation shield as they have fixed returns with no potential of increasing it. In many of the government deposits, liquidity is low and the flexibility is almost none as everything is fixed.
- Gold
- Gold has been a good investment and a wealth storage option for all our families and lives. As an investment, gold has always been a good bet but does not spin off any income (cash flow will come only if part of investment is sold which makes us tax liable sometimes).
- Gold has high liquidity, return potential and is a natural inflation shield but has very low flexibility and does not spin off any regular income.
- Annuities (LIC Jeevan Shanti)
- Annuity is where we give a lumpsum amount of money to an insurance company and they give us income for the rest of our life or for a fixed period or the rest of the last surviving joint holder depending upon the plan we choose.
- Though annuities guarantee an income stream as long as the holder/holders are alive, the return potential is fixed and does not protect us against inflation which makes it very less appealing as a long-term investment without liquidity.
- Hybrid Mutual Funds (Dynamic Asset Allocation)
- Dynamic asset allocation in simple words means the mutual fund manager gets to allocate money between low risk (Safe Debt / Bonds) and high-risk investments (Equity) based on market conditions but never based on the investor’s requirements. Some mutual fund schemes under this category have a dividend option but are not obligated to payout dividend.
- The major issue with these funds is that the asset allocation is dynamic and is not determined keeping the investor in mind but solely based on the market. Hybrid access to capital markets usually can give us an income stream without losing return potential while acting as a natural investment shield.
- Mutual Funds (Actively Managed)
- There are a wide range of mutual funds categorized in dozens of ways. This drives flexibility in managing our investments to choose how much income we want or risk we want or return potential we want to capture based on our requirements rather than completely based on the markets.
- You have been familiar with our active asset allocation management based on our PPP strategy and the major advantages here would be that we can generate an income stream as required, can protect the portfolio from inflation, be very flexible and liquid in investment options, be totally transparent about our decision making process and the underlying investments in your portfolio.
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