A well-constructed retirement cash flow table, which will consider your currently provisioned monthly income, inflation, expected returns, and life expectancy is vital to this process.
Let us take a moment to understand some challenges and smart money management tips for senior citizens.
Though you will be freed from the daily pressures of work, your senior years will bring into your life a unique set of finance-related challenges that may worry you. Have I saved enough? What if my money runs out? Should I invest aggressively or preserve my capital? Should I consume my resources, or try to bequeath? Should I find part-time work? These are just some questions that could be keeping you up at night. Here are some “take charge” measures that can help.
Take stock
If you haven’t done so already, take stock of everything you own as your holdings may be disorganised and scattered over so many decades of investing. Collate everything – your equity shares, mutual funds, life insurance policies, real estate, health insurance plans, etc. Draw up the details of your liabilities as well. Knowing exactly how much you own, and in what asset classes, is critical.
Also, take stock of your expected earnings by way of your pension, rentals, or incomes from annuity plans as well. All these need to be considered while drawing up a retirement cash flow table that is both useful and realistic. The support of an investing expert can be very helpful for this exercise.
Do not be in a hurry to de-risk
While it is a good idea to reduce investing risks, do not make the mistake of getting rid of your high-growth assets altogether in your senior years. Remember, your post-retirement assets need to keep pace with – or preferably, outpace inflation on a tax-adjusted basis. For that, you will need to maintain a judicious allocation to long-term growth assets like equities. Balance is key.
Here is a thought: Your post-retirement portfolio is likely to have a time horizon of anything from 15 to 25 years (with intermittent drawings, of course). That is a fantastic time horizon for an equity investment, isn’t it?
Here is another thought: The difference between an 8 percent return on your portfolio and a 10 percent return on your portfolio can mean a 10 percent difference in your post-retirement monthly income. There is a lot you could do with 10 percent extra at this life stage, and so it is a risk worth taking if you can manage your investing behaviour well, set realistic expectations, and invest according to a clear plan without getting carried away during market ups and downs. There is no reason why your “senior years” portfolio should not have a 25-40 percent allocation to equities. Don’t fall for investing cliches and thumb rules. Customisation is vital.
Have a plan
A well-constructed retirement cash flow table will consider your currently provisioned monthly income from other sources, inflation, expected returns and life expectancy. The cash flow table should also consider the approximate value of annual drawings for leisure trips and other fun activities. It should not be all boring!
A poorly constructed cash flow table is one that maintains a uniform drawing amount throughout your retirement age with the hope of ‘preserving’ your corpus. You simply have to give yourself a minimum 5 percent “increment” each year to keep up with inflation. If you need to deplete your corpus in a planned manner to achieve this, so be it.
Medical coverage is critical
Medical expenses are likely to escalate in your senior years. If you do not have health insurance, you should ideally get one. Evaluate all your options carefully – if a floating plan is prohibitively expensive, buy separate plans for yourself and your spouse. Do not settle for a mediocre insurer. Settlement ratios are very important to consider.
There could even be certain situations where health insurance is prohibitively costly and will not make sense. For instance, a 65-year-old with pre-existing conditions such as diabetes or hypertension may need to pay more than Rs 50,000 per year or more for a mere Rs 5 lakh cover. Whether or not this “one in 10” risk is worth bearing or transferring to an insurer is a subjective call. If you have got sufficient assets to cover this Rs 5 lakh, you may want to skip it – especially if there is a lengthy waiting period. Instead, you could just carve out part of your corpus as a ‘medical emergency’ fund, parking it away in a safe, load-free, liquid fund or arbitrage fund that grows at 6-7 percent per annum.
