Retirement is that phase of life where an individual depends on his retirement corpus to meet his day-to-day lifestyle, travel, and medical expenses. This corpus could consist of financial assets like shares, mutual funds, fixed deposits, or physical assets like real estate and gold. The size of the corpus determines the individual standard of living post-retirement.
Many salaried individuals receive retirement benefits, which include leave encashment, provident fund, gratuity, and superannuation. Investment of retirement funds should happen with two objectives—creating a stream of assured and regular cash flow and ensuring minimal erosion of corpus due to inflation. Also, it must be kept in mind that the corpus must last one’s lifetime.
When reinvesting retirement funds, capital safety must take precedence over returns. The corpus may be invested in a diversified portfolio of fixed-income and equity instruments to achieve the aforementioned objectives. The bulk of the retirement savings should be placed in safe, low-risk, fixed-income investments like fixed deposits, bonds, and NCDs. It is imperative that the average return on these investments be greater than inflation, which may necessitate the purchase of high-yield bonds.
Consequently, striking a balance between credit risk and return is essential. Your fixed-income portfolio must be sufficient to pay for your basic daily needs. Some of the funds must be kept in reserve in case of medical emergencies or other sudden costs. Any surplus fund can be put into well-managed large-cap or index funds, which are relatively stable and safer than small and midcap funds.
Importantly, medical expenses often increase as one enters their later years, which is why it's crucial to ensure comprehensive health coverage in your post-retirement phase. Many individuals tend to overlook the importance of individual health insurance plans during their working years, primarily relying on their employer's coverage. It is assumed you have an individual health insurance policy early in life as it will result in cost savings. If you don't have insurance cover, it is advised to set aside some amount as a contingency fund and carve out a separate medical fund from the retirement corpus.
Please note views expressed by the investment expert are his/her own.
