With a fixed amount saved up for his retirement, he is starting to worry about whether he can sustain his lifestyle in the future. “My wife and I lead a pretty simple life, but since we have been ordering things online after the lockdown, the slightly higher prices are starting to add up,” he said. Most of his investments are into debt instruments such as fixed deposits (FDs) and Senior Citizen Savings Scheme, and falling rates are adding to his woes.
Like Sadhu, a lot of retirees are seeing their retirement funds being hit from both ends. We explore how bad the impact is and what they can do to handle it.
The Reserve Bank of India (RBI) has been cutting rates over the last few months to support the economy. On the other hand, data published by the National Statistical Office on 13 August showed that retail inflation rose to 6.93% in July from 6.23% in June, with food inflation rising to 9.62% from 8.72%. The sudden spike in inflation can be attributed to covid-19-related supply side issues.
Inflation decreases the value of your money over time. In order to stay ahead of it, it is advisable to invest in instruments that give inflation-beating or real returns, which is the return minus inflation. With the gap between interest rate and inflation reducing for most traditional fixed-income products like FDs, real returns are going into the negative territory in some cases, which leads to an erosion in the value of the corpus.
“While RBI has cut interest rates, inflation is moving up. This has meant that fixed-income investors are earning negative real returns on their savings after fees and taxes,” said Rishad Manekia, founder and managing director, Kairos Capital Pvt. Ltd, a financial planning firm.
For retirees, this could mean their retirement savings running out during their lifetime.
cash flow problems
For some, the drying up of additional income streams has become a problem, said Shweta Jain, founder and CEO, Investography, a financial planning firm. “One of my retired clients has had his rental income stop due to the pandemic. He had factored in this income in his budget, so now he’s having difficulties without it,” she said.
It’s important for retirees to maintain passive sources of income, since cash inflows mostly cease after retirement, while expenses persist. “Post-covid, many tenants are facing financial challenges, and therefore, are looking to renegotiate their rental agreements. It is important for a retiree owner to be open to this renegotiation process, because it is better to have lower rent than no rent at all,” said Manekia.
Budgeting is another important aspect retirees must take into account. “Even people who have spent carefully through their lives tend to ‘live it up’ after retirement. This can hurt in the long run. Track your spending, stick to your budget and see if you have adequate corpus considering inflation and what is the return you need on your portfolio. Even a small miscalculation can have terrible consequences in the absence of an income,” said Jain.
Even if you do your due diligence, it’s important to remember that a sudden unplanned expense such as hospitalization can take a huge toll on your corpus.
Habib Datoobhoy, 88, a Mumbai-based retired lawyer, and his wife Rehana, 78, are confident about investments, having engaged a financial planner to handle their portfolio, but they still have some inflation-related concerns. “The cost of medical care is rising at an alarming rate, and even though we have health insurance and cash reserves for emergencies, it is worrying, given our age,” he said.
It is essential to be prepared for emergencies through adequate insurance and an emergency fund after you retire. “Senior citizens should consider overnight and liquid funds to park the money they may require suddenly, since they can withdraw without any penalty and still earn higher interest rates than normal bank rates,” said Divam Sharma, co-founder, Green Portfolio Management Services.
Need to branch out
After ensuring that the crucial aspects are covered, you might want to optimize the returns you make from your retirement corpus, given these uncertain times.
Although inflation is likely to soften going forward, as the impact of the pandemic eases out, the negative real returns are likely to persist for some time. Aside from inflation, factoring in taxation can further lower the returns one reaps from investments, especially those in higher tax brackets. “Higher tax bracket investors can invest into debt funds like AAA-rated short-term funds, banking and PSU funds and medium-term debt funds,” said Sameer Kaul, CEO and managing director, TrustPlutus Wealth Managers. Debt mutual funds also have the added advantage of lower tax liability since the long-term gains are taxed at 20% after three years, compared to FDs, the returns from which are added to the investor’s annual income and taxed according to the applicable tax slab.
How you branch out to hedge against inflation will also depend on your risk appetite and time horizon. “Typically, investments in gold are the best way to hedge against inflation for an investor with low risk appetite. However, if a person has just retired or is at an early stage of retirement, and can invest for a longer tenure, he can consider making some investment in equity to hedge against inflation and longevity,” said Manekia.
Though retirees are typically risk averse, given the current scenario, it might be a good idea to foray into equity, but keep in mind your risk appetite and take the help of a financial planner, if required.
Seeing the value of your corpus being eroded due to unforeseen circumstances can be nerve-racking in your golden years. Keep in mind that part of the squeeze is likely to ease out as the pandemic recedes, and the rest can be dealt with through diligent budgeting and smart decisions.