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Early Days of Freedom

People who have not been able to create a large enough retirement corpus feel perplexed when they hang up their boots. However, even those who have saved enough need to stick to a predetermined plan to ensure that their money outlasts them and they don’t go broke in retirement.

FIRST THINGS FIRST

At this stage, you need to create a regular income stream. Choose from a host of financial products, such as annuities of life insurance companies and monthly income plans (MIPs) of mutual funds, and make provisions for lump sum requirements, such as renovating the house and meeting uninsured medical emergencies. Last but not least, you also need to lay down a succession plan for your assets for their orderly distribution when you are no more.

INVESTMENT STRATEGY

You should focus on liquidity of your assets, management of taxes on your retirement funds, regular income and growth of your retirement kitty. Keeping your assets liquid might be a bit of a challenge as most fixed income instruments come with long lock-in periods of 3-10 years. Immediate annuities of life insurers come with the lifetime pension option. Use them to meet around half of your monthly household needs. Supplement this income by investing in Senior Citizens Saving Scheme, Post Office Monthly Income Scheme (POMIS), bank fixed deposits (FDs), bonds and other debt products. Ladder bank FDs for liquidity and interest rate advantage. Income could also come from dividends, MIPs and systematic withdrawal plans (SWPs) as well as rent from any property you might own. The key lies in creating a regular income stream.

Remain partly invested in equities after retirement to keep pace with inflation. To this end, invest in balanced or diversified equity funds having consistent track records.

TAXABILITY

As interest income from most fixed income instruments is taxable, it will add to your tax liability. Use tax-saving instruments to bring down your tax outgo—create a retirement portfolio accordingly. Hold on to investments in mutual funds and stocks, which you can liquidate when you want and where gains are not taxable over the long term. Use these investments to grow your retirement corpus. They will also ensure that your tax liability never becomes burdensome.

MANAGE EXPENSES

Your expenses will now be restricted mainly to your and your spouse’s living expenses, and expenses on healthcare, gifting and travelling. There could be additional expenses if your children are still dependent on you.

There is also a change in the nature of your expenses. For example, in your work life, you would have spent on commuting, formal attire and business lunches and dinners. All this stops after retirement. At the same time, healthcare expenses may go up.

THINGS TO AVOID

Curb the tendency to splurge. Many people tend to spend excessively in their early retirement years. This is usually due to two reasons. First, at retirement, you receive benefits along with funds from insurance pension plans. This sudden deluge of funds tempts you to splurge. Second, you suddenly find a lot of free time in retirement. This encourages you to spend on either yourself or on your near and dear ones. This can have a very damaging effect on retirement funds - by thinning the base of money, it hits the compounding effect on your retirement funds.

After retirement, don't invest in corporate bonds unless the ratings are satisfactory and the issuer has an established track record. Avoid buying any life insurance product unless you still have financial liabilities. Stay away from unit-linked insurance plans (Ulips). Keep yourself and your spouse covered through health insurance plans, especially the ones that offer lifetime renewability. Finally, review your contingency fund at intervals. That's because you are now more prone to medical emergencies and you might need to augment it.

Next To Come: Fuel for the Last Leg