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Sam Ghosh Founder and SEBI Regd. Investment Adviser at Wisejay Private Limited Bangalore, Karnataka
Investing and Personal Finances after retirement.
1 answer/comment
09:30:39 AM, 30th April, 2019
  • Sam GhoshFounder and SEBI Regd. Investment Adviser at Wisejay Private LimitedBangalore, Karnataka
    Profile

    Life changes after retirement. You get the freedom and time to do things you always wanted but could not find time for. On the other hand, your source of income takes a drastic change. Depending on whether you have a pension plan or not, your regular income either decreases quite a bit or completely disappears.

    But, you may also receive a large chunk of money from the providend fund, gratuity etc. Given this situation, we need to change our personal financial management. In this post, we will look into different aspects of it.



    FINANCIAL PRIORITIES AFTER RETIREMENT

    First, let us understand how financial priorities change with retirement.


    1. Risk Tolerance

    There are multiple factors that affect our risk tolerance after retirement.

    Lack or reduction of regular income decreases our risk tolerance quite a bit. High-risk investments tend to be illiquid.

    The investment horizon also keeps on reducing as we age. This increases the need for preservation of capital.


    2. Investment Objectives

    As our regular income takes a hit after retirement, our savings need to recoup for the lifestyle expenses. This means investment objective changes from growth to the preservation of capital and liquidity.



    3. Changing expenses

    The type of expenses changes as we age. One obvious change is medical expenses which tend to increase with age. People often receive medical benefits from employers. These benefits may not be available after retirement.

    Also, you may want to travel or indulge in other hobbies after retirement requiring higher liquidity.



    SO, WHAT SHOULD YOU DO?

    1. Evaluate financial changes

    The first step is to take the time to evaluate the changes in your financial situation which you are going to face with retirement.

    How is your monthly income going to be impacted?

    Will you lose your medical benefits?

    Will you lose the company provided residence?

    Will you need to relocate?

    ....


    2. Create a plan to manage the changes

    Now, you need a plan to deal with the changes.

    For example, you may find that there will be a significant shortfall of monthly cash-flow after retirement. You may deal with this by buying annuity plans.

    You may find that you are going to lose your medical benefits. You may plan to buy private medical insurance for you and your spouse.

    If you have to relocate, you may plan to buy a new residence with the retirement benefits.


    3. Respect higher liquidity needs

    Planning your finances after retirement can be daunting and it is easy to drastically underestimate your liquidity needs. We are often unaware of the employment benefits we receive before we lose them.

    While planning for your monthly cash requirements add an abundant margin of safety. Avoid any situation where you do not have enough cash to pay the bills. Create a large enough emergency fund which you can withdraw from any time you want.


    2. Take a phased approach in portfolio re-allocation

    Retirement calls for re-allocation of your portfolio. But, avoid changing the portfolio drastically overnight. The re-allocation should ideally start before retirement and continue much after retirement.

    While liquidity requirement changes drastically, the time horizon decreases gradually. So, your risk tolerance after retirement does not decrease drastically. Do not rush into redeeming all equity investments and invest everything in fixed deposits.

    While after retirement the objective changes to preservation – you can still have a small percentage of your portfolio in equity assets much after retirement. A drastically conservative portfolio just after the retirement may lead to running out of savings.



    3. Preparing for distribution

    Another important aspect after retirement is estate planning i.e. creating a plan for the distribution of assets to your next of kin.

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