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Second Rite of Passage

As you near your retirement, the horizon becomes clearer. You can see a sea change in your lifestyle on either side of the retirement day. By now, most of your big-ticket goals have been realised, save one - creating a nest egg and ensuring a secure and comfortable retirement. That’s why it’s important to build a retirement kitty of optimum size during your work life.

DERISKING

Unlike during the accumulation phase, where you would, perhaps, have invested in equities to save for your retirement, now you need to ensure safety of capital by moving out of volatile instruments, such as equity, into lower-risk options. Derisk gradually - in all your stockmarket -linked investments, such as equity mutual funds, shift slowly from growth options to debt options. The quantum of money that you should move, however, will be determined not just by your risk orientation, but also by whether or not you plan a second career in retirement.

If you expect to keep earning when others have hung up their boots, you may risk a higher equity exposure than might be considered prudent for your age. But if you plan to live off your investments and savings, debt has to be the most important portion of your portfolio.

THE PROCESS

Initially, park your retirement corpus - such as gratuity, provident fund (PF) and the capital accumulated over the years from stocks and mutual funds - in short - term bank deposits. Take your time to meticulously chalk out and identify last-minute investment avenues. Apart from safety and liquidity, pay attention to tax issues to ensure that after retirement your tax liability is minimal.

THE AVENUES

First of all, create a contingency fund to cater to emergency expenses such as medical needs. Use short-term bank fixed deposits to this end. Thereafter, identify instruments that would help you prepare for a regular monthly income. Annuity plans from life insurers that provide pension during one’s lifetime and, thereafter, to one’s spouse, can cater to almost half of your needs. Further, a mix of bank fixed deposits, Senior Citizens Savings Scheme, post office Monthly Income Scheme and long-term bonds may supplement monthly requirements. If possible, keep 10-20 per cent of your money in equity or equity-linked funds to help retirement funds beat inflation - you may opt for monthly income plans of mutual funds having 15-30 per cent exposure in equities.

Alternatively, you can also park money in balanced funds with a maximum exposure of 65 per cent in equities. If you do not want to exit existing MF investments, you may opt for systematic withdrawal plans (SWPs) too. MIPs have a small exposure to equities and, depending on their performance, they offer dividends that help in meeting regular expenses. An SWP, on the other hand, fetches you regular income from a mutual fund as you keep withdrawing units from it.

LAST WORD

It is important to take note of the life expectancy of women, which is usually higher than that for men. Therefore, provide for monthly expenses for your spouse for at least five more years than what you would for yourself. Keep provisions for long-term savings in longtenured fixed income securities, such as bonds with tenures of seven years or more, fixed deposits and National Savings Certificates (NSCs). Periodic maturities will create periodic flows.

Next To Come: Make Early Exit Count