Polish your nest egg

Your post-retirement portfolio should be built on the basis of your current risk tolerance level. Since only 10% of India’s working population has any form of social security and the average life expectancy of an urban Indian may touch 80 years by 2020,early retirement planning is important to maintain your living standards.

Rising life expectancy raises longevity risk,meaning a retired person may outlive his investments and the portfolio won’t have enough to sustain the desired lifestyle. Risks from volatile markets and fluctuating interest rates can impact retirement savings. It is also important to inflation-proof investments since rising prices erode the value of money.

Any retirement portfolio should have two components. One which earns the minimum income to sustain a basic lifestyle through annuity and monthly income plans and the other which gains from the upside through select equity exposure. The portfolio should be monitored at regular intervals and provisions for contingencies made.

WealthWays Private Wealth Management founder Brijesh Damodaran says a few years before retirement,one should study the corpus and the expenses which will continue. “One must look at the risk profile and invest required amounts in products which help generate returns. Most importantly,one should invest in products which one understands,” he says.

Fixed income,which protects capital,is a major part of retirement investment. Senior citizens’ savings schemes offer higher interest at 9% and the interest is paid every quarter. An individual over 60 can invest a minimum of Rs 1,000 and maximum of Rs 15 lakh up to five years,which is extendible for three more years. A person over 55 who has opted for voluntary retirement scheme can also benefit from the scheme. Post offices,branches of 24 nationalised banks and one private sector bank – ICICI Bank – offer such schemes. There’s a rider though: If the interest crosses Rs 10,000 in a year,it becomes taxable. Premature withdrawals are possible by paying a penalty of 1.5% of the principal if the account is closed after the first two years and 1% after the scheme completes two years.

Post office savings are popular with fixed income seekers. The postal monthly income scheme pays 8% interest per annum for a period of six years. After completing the tenure,a bonus 5% of the principal is also paid. One can invest Rs 4.5 lakh in a single account and Rs 9 lakh in a joint account. Other similar schemes include National Savings Certificate which pay 8% per year on a half-yearly compounding basis for six years and Kisan Vikas Patra where the money doubles in eight years and seven months.

Mutual funds offer monthly payouts where the fund house invests a major portion in debt instruments across tenures. However,a retired investor must be conscious of their risks since investments are market-linked. The same is the case with fixed maturity plans which are close-ended MF schemes with indicated yields.

State-owned and private insurance companies too offer fixed annuity pension products. With the latest insurance guidelines,an insurer which guarantees a minimum amount must make higher allocation of investments in debt products,which may or may not generate a real rate of return,exceeding inflation. Aegon Religare Life Insurance chief operating officer Rajiv Jamkhedkar says in the future there would be more fixed annuity products.

Rebalancing portfolios ensures that investments do not overemphasise any asset category. Selling investments from overweighted categories and using the money to invest fresh in under-weighted categories will help reap profit and escape longevity risk.