Most retirees are creatures of habits. They are very particular about their schedule and routine. The same follows them when it comes to managing money. Understandably, they keep a lot of money in the bank as deposits that will earn them a fixed interest, which looks very attractive, considering the guarantee it offers and the capital that it protects.

Each passing year over the past decade has predominantly been one when interest rates have been dipping; making income streams from such deposits go down as well. Moreover, the income stream is also impacted by inflation, which has been above the assumed average. Lastly, the interest earned from bank deposits is treated as income and taxed accordingly, which is very often ignored by depositors. Effectively, the real returns from such deposits have been on the downward slope.

Tax efficiency

For savings and investments to work for you, you should work towards deploying them in tax efficient instruments to ensure overall tax advantage from your portfolio returns. When looking for high fixed returns and safety, factor in the inflation to evaluate the real returns as well. This exercise will help you understand what you really get when depending on bank deposits. Moreover, the scenario that is slowly emerging when it comes to returns from deposits and rising inflation, what you will earn post tax is very little.

You could instead consider putting money in monthly income plans, which are tax efficient, but do not guarantee capital protection or returns. But, going by performance, they are suitable to your needs. If you have never had an equity exposure, it is not too late; you could consider putting aside about 10 per cent of your savings and investments into a diversified equity portfolio of balanced funds, which automatically manage asset rebalancing. This way, you will ensure that capital appreciates to the extent of your equity exposure, which after a few years of experience you could consider enhancing to offset the lower real returns that the fixed return instruments provide.

Do not ignore the impact of inflation, which should be added to the portfolio as with every passing year the cost of living goes up and purchasing power goes down for every rupee spent. Naturally, as your living expenses go up, you will withdraw more from your fixed return instruments, which will impact the capital anyway. To augment such a possibility – you will need to take equity exposure to counter the impact of inflation to ensure that your corpus could grow over time. Remember, retirement is a crucial phase of your life. You will need to consider capital protection, growth and returns when deploying your savings at the time of retirement.

Another financial instrument which is a must during retirement is health insurance. Healthcare costs have been going up and it grows at a pace which is faster than the inflation that we face. It would be wise to have a health insurance policy when you retire than be exposed to vagaries of life when you will be using your savings to address even minor health related issues.

olmdesk@outlookindia.com