Summary of this article
The increasing life expectancy, together with escalating medical costs, will lead to a greater possibility of your retirement savings falling short. So, how to protect your retirement savings and ensure they last longer?
Entering retirement doesn’t mean the end of financial planning. Your accumulated savings will continue to face pressure from inflation and taxation, while rising life expectancy and soaring healthcare cost will increase the risk of your corpus running out sooner than expected.
Here are four financial strategies that will help you protect your retirement savings for the long term.
1. Secure Steady Returns With Low-Risk, Income-Generating Options
The majority of retirees receive advice to convert their retirement savings from gratuity and provident funds into annuities. However, these financial products generate returns that only match inflation rates.
What to do: After estimating your short-term financial goals, you can invest the proceeds of your retirement schemes in high-yield bank fixed deposits (FDs) offered by small finance banks (SFBs) and a few private sector banks. These banks offer the highest deposit rates, around 7.50-9 per cent per annum to senior citizens.
The FDs at these banks provide the same security level as other banks because the deposit insurance program of the Deposit Insurance and Credit Guarantee Corporation (DICGC) protects customer deposits up to Rs 5 lakh per account in case of bank failure, according to Reserve Bank of India (RBI) regulations.
One may also consider investing a portion of one's retirement funds into ultra-short term debt funds. These debt funds usually outperform FDs in terms of returns. The money left over from your short-term goals can go into equity funds, which should match your risk tolerance level.
2. Have Adequate Emergency Fund
A retiree needs to have a sufficient emergency fund that matches the requirements of any active working person. The risks from an insufficient emergency fund would become worse for the retiree because they would face difficulties obtaining emergency loans during their post-retirement years. Fixed income investments lose value when you sell them before their maturity date because of trading penalties. The need to sell equity investments at a loss or poor returns arises when financial emergencies strike during market downturns.
What to do: Calculate your essential monthly expenses, including your utility bills, rent, medical expenses, and equated monthly instalments (EMIs), among others, at least for six months, and deposit that amount into a high yield savings account. People who know how to use online banking or mobile banking should save their emergency money in fixed deposits.
3. Get Adequate Health Cover
Older people need proper health insurance coverage, because ageing increases their chance of developing health problems and getting sick.
Your medical expenses will rise because you will live longer and medical service prices will keep going up. Your retirement savings will function as your only health insurance coverage because you will lack employer-sponsored group health insurance. This strategy will cause your retirement savings to run out at a faster rate.
What to do: Purchase an adequate health cover, even if it comes at a higher premium. If you already have it, opt for top-ups from your existing health insurer to cover the deficit resulting from the withdrawal of your employer-provided health cover. The premium charged on top-up health covers would be lower than purchasing an additional health insurance policy.
4. Remain Invested In Equities
Seniors are often advised to sell their equity holdings in favour of debt funds and fixed income instruments when they reach retirement age.
Fixed income instruments, however, do not generate returns that exceed inflation rates, according to historical data. The tax deduction on inflation-adjusted income would result in a lower return for people who pay higher taxes. The strategy of moving all your money into fixed income investments creates a danger that your retirement savings will vanish before you die.
What to do: According to financial experts, equity stands as the superior asset class because it delivers better returns than fixed income instruments and inflation over time. So, you need to also keep investing in equity to protect your retirement savings. Instead of moving all your equity investments into fixed income products at once, you should choose to do it gradually.
