Life towards Financial Freedom

One of the most clichéd representations of retirement is a couple walking on sand on an empty beach or that of an easy chair with or without an elderly couple sitting on it. Cut into a quiet Hyderabad apartment where 73-year-old S Ramamoorthy lives in the company of his wife Lakshmi and 94-yearold mother. The picture is pleasing, but very different from the usual visual symbols that connote retirement.

It is 14 years since he retired and he is content the way his life has shaped after working with ITC for several years. “I keep myself occupied by reading a lot and meeting friends. I also travel to spend time with my daughter who lives in Muscat and son who is in the US,” he says. Today, rarely do you come across a retiree with an extremely dull routine in retirement. Just the way planning for retirement has changed, so is the case with people living in retirement.

The upside of retirement is that you will need a lot less than you did at the peak of your working years in order to maintain your lifestyle. After all, many of the expenses that you had in your middle years usually don’t continue in retirement. These typically include cost of raising children, paying for your home loan and work-related costs such as transportation, tax deductions, among others.

Retirees can be easily found living their lives in their cherished homes, in retirement communities and equally at ease with their children and grand children. Irrespective of where they stay, most retirees are financially comfortable because of some deft planning that they did in their working years. However, that is not necessarily the case with all retirees; many are grappling with developments that are playing havoc in their minds and affecting their financial lives.

Financial concerns

Unlike those in their 50s, who are fast approaching retirement and are concerned over having enough to retire, retirees face a different dilemma—is their retirement corpus sufficient? There is no doubt that for a comfortable retirement, it is necessary to accumulate adequate savings over the course of one’s working life. “Moneywise, the biggest worry is keeping up with inflation. In the current downward interest rate trend, reinvestment of funds invested in shorter term fixed income instruments is very worrisome for retirees,” says Kiran Telang, co-founder & director, Dhanayush Capital Advisors.

“Inflation is a big threat and is making money useless. My expenses have gone up—phone bills, and electricity bills are very expensive,” says Kolkata-based Dr Uma Roy (73). This former academic lives with her son, but continues to be associated as an examiner and guide for PhD and MsC students.

Increase in longevity means you may be living a good 25-30 years in retirement or even more. The answer to whether your retirement savings will last your lifetime depends on how long your retirement will be. As most people don’t know how long they are going to live it’s hard to know how long their money needs to last. At a very basic level— you don’t want to use up your money too quickly and risk not having enough later on. “We usually plan retirement funding till one is 90 years old,” adds Telang.

“Most retired people now have a place to live by the time they retire—so one major expense is taken care of. This also leaves one free to spend on all other needs comfortably,” feels Delhi-based V K Mahajan (78). At the same time, hardly any retiree would want to live more frugally than they need to. Striking the balance without getting stressed about it is important. This also means that one should factor in unexpected expenses in the form of travel to spend time with children or changes in taxation and interest rates, which impact one’s savings.

“Earlier the concerns were on education and marriage of my children and how I was to prepare for them. Now my concern is over unexpected medical expenses,” says Ramamoorthy. Most retirees who have never parked their money outside the bank deposits are facing a situation of real returns (inflation adjusted returns) to be either barely keeping track with inflation or in worse case, having negative returns. For those who have not understood how this upsets the best laid out plans need to do so at the earliest to mend their retirement kitty.

Real risks

Going by the income streams that retirees have, it could be pension, interest from savings in the bank, rental income, and annuity or by way of investments in equities. For those who rely only on savings to meet retirement cash-flows are at the risk of eating into their retirement capital. The longer such an arrangement goes on, the less savings you will have and the greater the risk of these running out.

“Most people in late 60s look for conservation of their investments to provide them enough retirement income to support their monthly expenses till their life expectancy without fail,” says Sudipto Roy, managing director, Principal Retirement Advisors. The conservative bent of mind also means that one rarely considers putting money in equities, which as an asset class has the potential to beat inflation in the long run. However, there is a class of investors who are not averse to small dose of equities in their retirement to boost their corpus and maintain their standard of living.

“Indian investors are warming up to equity as an asset class and we are increasingly noticing investors above 60 investing in it,” says Saravana Kumar, CIO, LIC Mutual Fund. Investors who have sufficient funds to take care of their immediate and medium-term expenses choose to invest in equities.

Investing is also about deploying the same in tax efficient instruments and also in a manner that they are liquid. For instance, bank fixed deposit comes with the limitation of penalising depositors on early closure and the interest earned is treated as income, which is taxable. In contrast, one could consider investing in debt mutual funds which would work better.

“Debt as an asset class is more suited to people in late 50s or 60s considering that the objective is to secure principal with minimal volatility. Moreover, people in this age bracket usually receive huge amount in form of retirement corpus and there is a pressing need to utilise the savings into a secure form of investment which gives higher returns,” adds Kumar.

As retirees also fall under the income tax bracket, they could consider deploying money into tax saving instruments to achieve tax savings as well as gains by way of investments. Today, investing money in retirement is a fact that must be considered early on in retirement. “Investing is not just about building wealth and money. They are a tool for your desires, about creating freedom, time, memories and peace of mind,” explains R. Raja, head—products, UTI AMC. Investment is an effort which should be successful so as to not lose money and end up losing the principal, explains Raja.

Managing money in retirement

While retirees rarely have any financial commitments, they should not be ignoring insurance, especially health insurance. In the absence of social security, rising healthcare expenses can disturb their finances. A way out is to maintain a health insurance policy at every stage in life, especially in retirement. Says Antony Jacob, CEO, Apollo Munich Health Insurance: “As people are living much longer lives, health insurance coverage is an imperative financial planning tool to mitigate the rising costs of medical care.”

If you have taken a health policy only after you retired, the policy may not cover every ailment. “Health insurance bought at a later stage in life have certain limitations. Some plans are also restrictive in nature as they include co-pay and sub-limits clauses and may have additional pre-existing disease clauses,” warns Jacob.

At any point in your retirement if your income stream is producing more cash than you are spending, you should think about how to invest that excess cash flow. When investing, be sure to make liquidity—how quickly you need access to your cash—a central consideration.

“We tell our clients to invest in equity and create a systematic withdrawal plan. The idea is to make the capital grow at 10-12 per cent, but the individual makes withdrawals according to his expenditure or situation,” explains Suri. “So, at one stage he may be withdrawing Rs.50,000 a month and a few months later Rs.55,000,”

However, the reality with several retirees is this: they are asset rich and income poor. For this reason most will have to consciously diminish their capital to support their lifestyle. It will be wiser to scale down from a big apartment to a smaller one. “There is usually an emotional connect with property and very few people actually end up selling it to fund retirement income,” adds Telang. Reverse mortgage is an option for those who have emotional attachment that they are unable to come out of.

Enjoy the golden years

Spend time in activities that you enjoy and do make it a point to interact with youngsters— they will have ideas that can help you see life in a different light. Your grown children and their offspring may need your assistance sometime during your retirement years. “I spend a lot of time with my grandson. Nothing gives me more pleasure,” beams Roy.

With several retirees living alone, the onus is on them to find ways to have a happy retired life. “My wife and I live in Delhi and our medical requirements are well provided for,” adds Mahajan. Both his son and daughter are settled in the US, whom the Mahajans visit, but like every bird that comes back to its nest, so do the Mahajans.

olmdesk@outlookindia.com