In a dynamic and insightful discussion in Outlook Money’s 40After40 Retirement Expo, industry leaders including Swarup Mohanty, Vice Chairman & CEO of Mirae Asset Managers (India), Vibha Padalkar, MD & CEO of HDFC Life Insurance, and Kamlesh Rao, MD & CEO of Aditya Birla Sun Life Insurance participated in an engaging and comprehensive conversation on the critical subject of post-retirement financial strategies. The discussion, thoughtfully moderated by Nidhi Sinha, Editor of Outlook Money, delved into wealth preservation and growth in the post-retirement phase. With a wealth of experience and expertise, these distinguished panellists shared valuable insights that promise to guide individuals towards informed and effective financial decisions in their retirement years. This exclusive dialogue serves as a beacon for those navigating the complexities of managing finances during the golden years, offering a roadmap for wealth preservation and growth post-retirement. Read on:
Nidhi Sinha: The topic of discussion today is wealth preservation and growth post-retirement. While planning for retirement is a challenge, a bigger one often presents itself after retirement, as you have to balance your cash flow. The kind of growth of your corpus witnesses in the later years of retirement. Inflation, of course, we know is the biggest enemy. And we often talk about the power of compounding when it comes to investments. But that often also applies to the expenses because the expenses are compounding equally because of inflation. So, this becomes a primary concern for many senior and retired citizens. With rising life expectancy, the period is becoming just longer and longer. So, the first thing that is important to understand is why is wealth preservation is so important, especially after retirement?
Vibha Padalkar: Reasons for that are manifold, but largely at a macro level, inflow stops and outflow continues. Outflow not only continues but continues to increase when it is inflation-adjusted. And therein lies the need that continues to grow, especially health-related needs. So that becomes a potential recipe for not disaster, but something that one should pay enough attention to. Some of this is fixable because if one hasn’t started early, one can correct it quickly and see what it will cost. For example, today, I have hip replacement surgery. If it costs the senior citizen four and a half lakhs now, that will cost maybe 5 or 6 times post-retirement or over the next 20 years. So is one prepared to pay Rs 25-30 lakh? So, one has to be careful. That’s the reason why it starts becoming increasingly necessary. One thinks about planning for some of these. Right?
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Nidhi Sinha: Could you suggest some strategies for wealth preservation post-retirement considering the factors you’re discussing about inflation and health inflation? What are the things that people can do? Like, I’m 60? Let’s say I have a corpus, but what do I do to balance things?
Kamlesh Rao: I think many instruments help plan for what you want to do in the future. The biggest issue is that you don’t know what you need at 60. If you have an idea of what you are planning for, considering factors like inflation, mortality, and health expenses, you need to have a mix. Equity does a lot on a long-term basis. But maybe there are also dividend-yielding stocks to look at because you get part of the growth, as well as companies with a great track record in terms of what they pay as dividends over time. So whether you’re looking at equity, debt, or bonds, you must make sure you stagger your investments because you can’t time the market; nobody knows whether the interest rate cycle will go up or down.
So you need to make sure, in bonds, you have varying maturities so that you keep getting money frequently at different points in time. And then you can play the game then. You can reinvest at the rate then. If you’re doing bonds, you must have that kind of stuff. If you are into mutual funds, then there are plans about systematic withdrawal plans. It means you’ve invested in something for which you can withdraw over different points of time. And then last comes insurance; you need to plan for your annuity. We think the money that has gone into NPS is good enough for what we believe will happen when we retire at 60, but it’s not good enough.
At whatever point you start, you can build a huge corpus for your retirement if you start planning for your annuity. I don’t think at 30 or 35 years, you can begin. Everybody says to start young, but at 35 years, you are more worried about paying your home loan EMI and car EMI rather than worrying about your annuity, broadly at 45-50 years, in that range, and you can plan for an annuity. And there are products available, which can be inflation-linked or variable annuities that keep going up over time. So, you need to have a mix. It’s not that one asset class will answer that question. So, the annuities give guaranteed interest rate benefits for the next 40 years. And no product in the industry offers you a hedge of interest rate guaranteed for over 40 years. Today, we are at a 6-7 per cent interest rate; once we become a developed nation, we will return to interest rates, which could be 2-3 per cent. But if you plan for your annuity today, you could have a 6-7 per cent return for the next 40 years. So my sense is to have a mix of some of these and don’t bother about starting early. I haven’t started. And there’s nothing like timing. Somebody asked about markets. Right now if you haven’t started, start now. I mean, there’s no better time than starting from here.
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Vibha Padalkar: Sorry to interrupt, but I’m from life insurance, and since he mentioned annuity, one of the big criticisms of annuity is that it is taxed. We Indians, including me, overthink the tax aspect. People need to understand that one can run out of money if one only has some of the other asset classes. There is longevity risk, which is a risk of outliving one’s savings. So again, balance, like a balanced diet, is very important, and not overthink the fact that it will be taxed. Also, when you look at tax at that time, perhaps one is at much lower marginal tax rates.
Nidhi Sinha: Tax was also discussed earlier in the day. How are NPS proceeds taxed and mutual fund proceeds taxed? Coming to mutual funds, long-term is something that we keep talking about, and we say start early. And then you can build a good corpus. But sometimes people say that you may not have enough money to save when you’re younger. But as we are here tackling post-retirement, so suppose you have a corpus, how do you bucket your corpus in a way that it can give you some amount of growth for later years?
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Swarup Mohanty: Thank you so much for having me on this panel. First, I think the biggest ticking bomb in India is retirement planning or the lack of it. Just 6 per cent of Indians have a pension. Right? The rest will create a bunch. That’s the situation we are in. And trust me, we’ve had these very evolved discussions in a fund house like ours; people in Mumbai are clueless about how much money they will need to stay in Mumbai post-retirement! At that age, two things are happening. One is the issue of longevity. If you’re going to live long, then the only friend you have, as the so-called large families have disintegrated, the only thing that will stand by you is money. If I ask this audience, what is more important for you – wealth or health? They will all smile and tell me about health, but in their mind, it is wealth. Right? That’s the truth. So, when you look at building your life now, I think retirement is one stop in your overall life. Earlier, we used to have this whole thing that after you retire, your corpus should become conservative. It was okay if it would last for another 10-15 years. But there, the theme is 40 after 40. So you talk about 40 years after that. I personally don’t feel any change should happen to your portfolio.
When you build your portfolio, it caters to your risk profile. And that is how your portfolio is created. If you don’t continue creating money post-retirement, you run out of money. So, for me, retirement is just one stop, and your life continues. So, the core of the portfolio should continue if you want to continue living life, and my basic view is that if I’ve slogged for 40 years, I should be leading a better life after I retire. Otherwise, why did I slog for 40 years? So, nothing should change; you should sit with your planner, and you will not make a plan if you don’t know what you want in your life. There are enough products between the three of us to cater to that. But that is secondary as people should realise what they want for 40 years. That is more important than products, which is very, very elementary.
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Nidhi Sinha: Yes, it is. But what is also coming out from the discussion is asset allocation, which is very important to balance stability and growth. So what kind of asset? I will talk about products because, ultimately, people do have to choose one. So, what products will you suggest to provide growth and stability? There’s also the aspect that many seniors are looking for guaranteed income. So they ran after FDs. So what are the things that you would suggest?
Vibha Padalkar: It will have to be individually catered to personal situations. But if I were to broadly bucket, the first is health insurance, which is very important because that will eat into one’s corpus; there is medical inflation. So how about getting that out of the way, wherein you, your spouse, or the dependents are getting adequate health insurance? Second, does one have a home or not? Is your house paid for? That becomes an important criterion. If it is not paid for, I strongly urge one to cover it. There are products for long-term, guaranteed outcomes just to pay for that, and then everything else is discretionary. Even if you have very little leftover work, at least your bread and butter is cared for in terms of not worrying about things. Thereafter, depending on the situation, one can look at an equity upside, and there are various products for that if you’re okay to lose everything you put in. So, that depends on your risk appetite. If you’re not okay with that, that incremental amount can be put towards your balance portfolio in terms of playing a little bit easier and safer.
The bottom line is that you can live a worry-free lifestyle by doing all of this. Why are we all working so hard for 30-40 years and then continue worrying about things? So the whole tagline of HDFC Life is “Sar utha ke jio”. We conceptualise this 23-24 years ago when people did not understand retirement, but it was all about this, you know, how does one live with dignity? How does one start enjoying the fruits of labour? I think that is how one feels about retirement years, and this speaks to one’s situation and liabilities and dependents, and then the answers start materialising. There are enough products, but the answers must be tailor-made for your situation.
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Kamlesh Rao: Mathematically if you look at it, you need to have a corpus where you need to define roughly about four and four-and-a-half per cent withdrawal every year. They call it the rule of 4 per cent, which means that the corpus you have, you should be able to utilise 4 per cent of it every year. If you can keep health out of it, that doesn’t bring incremental cost. A lot of people buy term insurance, but you try and cover by saying I’m buying term insurance for death. Term insurance technically is not just available for death. You can purchase insurance, which says after 60 if I don’t die, then convert the premium that I paid into an annuity stream for the rest of my life. And there are products available like that in the marketplace today.
You may end up paying a slightly higher premium, but think through when you’re doing planning. My 24-year-old son thinks I’m supposed to take care of him when he’s studying, and I’m supposed to take care of myself, and I’m retiring. It’s not the old philosophy that you think your kids will take care of you when you’re retiring. And if you want to have a better life, start thinking from that perspective. You’re 60 to 80, then you should have a better life, you’ve taken care of all your loans by that point in time, and you have a house. A reverse mortgage is a great principle to get cash flow from your home so that you can enjoy that benefit while living rather than worrying about what you will leave behind if something goes wrong with you. I’m just saying that mindset for retirement is critical before we get into the products for retirement.
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Swarup Mohanty: It’s very interesting; the word you used is guarantee because it comes post-retirement. See, nothing in this world is free. Whenever you are asking for a guarantee, it comes with a cost. In today’s world, there are enough tools to go online and check. What is the cost of that guarantee? If you are aware and take the guarantee, then there are no problems. Nine out of 10 people are unaware of what they seek. And without guarantee, there are also enough products that can cater to you and maybe get a little better. So please, this fallacy of guarantee needs to be dismantled in the world today.
Nidhi Sinha: Yeah, but the other thing is that you know what we feel about it because this retirement planning issue is big.
Swarup Mohanty: It is immaterial because 60% of the world population under 30s is in India. We are now a small part of this population, and the world which will now be built is different. We are a minority now. Please understand.
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Nidhi Sinha: Yeah, definitely. But it’s also perhaps time for various industries to work together and stitch a narrative, keeping asset allocation in mind where different kinds of things with other purposes come into the picture and make it a holistic solution for the consumer. That’s the interest that we are looking at right now. So, coming back to cash flow and that kind of discussion, insurance has an annuity, and there are questions about its returns, inflation rating, etc. But we know costs and other things are involved in calculating that kind of return. SWP, the mutual fund industry, can grow as well. So, how do you balance the two? So, if you could talk about SWP, how does it work as an effective cash flow tool?
Swarup Mohanty: A systematic withdrawal plan is like taking money from your bank. You have to define how much money will lead to that 4 per cent rule? Suppose with my lifestyle, I will not be okay with 4 per cent; I need 7 per cent. Returning to the first question, do I know how much I need? Are you sitting with a planner? Or are you sitting with yourself to decide at 60? I will need this kind of money if there is the thumb rule of 4 per cent. Then you put that 4 per cent and start withdrawing. I have met enough professionals, fairly educated professionals, who shrink post-retirement. Suddenly, they feel they don’t have money. But if you just put a good mathematical tool to it, we will do this very interesting calculation even after withdrawing. Some rule says that in Mumbai, you need three crores of today’s day per family member to retire.
There’s some study. Now, on three crores, suppose you were to put a systematic withdrawal of 6 per cent for a portfolio yielding 1 per cent from a 7 per cent return. That 1 per cent that you will leave behind in that portfolio, compounded at your investment yield of the portfolio, will leave the legacy behind. We have to be aware of what we want. Once we know what we want, there are enough products on the insurance side, like insurance annuity, etc. Once you know how much you need or how much cash flow you will need after that, whether it’s insurance or mutual fund, you can work backwards. Simple point: Knowing how much you want is important, and then the rest is easy.
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Nidhi Sinha: Yes, assessment of your situation is important. Would you like to add on this whole cash flow business in terms of the combination of annuities and SWPs working to balance each other out in terms of returns and give slight growth and other things?
Vibha Padalkar: Yeah, I think it does. I have bought some of those products that give those solutions, wherein at HDFC Life, we have tagged it as my first salary after retirement. It is as if a pay cheque comes on the first of every month. I have defined my society charges because then I don’t need to think about it; I don’t need to liquidate anything. There will be other products; it could be SWP, government bonds, whatever, it could even be equity or dividend-paying stocks, whatever that is, for maybe discretionary expenses.
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Nidhi Sinha: Wealth preservation is also part of the topic, and equities can play a role because many people are worried about how they’ll spend after retirement and leaving a legacy behind. So, what do you have to say?
Swarup Mohanty: I think when you look at wealth preservation, it comes with wealth growth because then you have two to three things to add. One is inflation, lifestyle inflation creeps in without you knowing. Are you aware of the lifestyle inflation that you are incurring every day in your life? Are you aware of the GST growth that has happened? For some items now, we are paying 28 per cent GST. What if half of your needs are catered to 28 per cent? So, one part is capital preservation. The other part is adding this inflation to see what the preservation amount is leading to here; a part of your asset always has to be in growth assets perpetually till you die.
Let’s face some reality: even on your deathbed, the hospital comes in, puts some machines and charges something more from you in the last two to three days. You would want yourself to pay for that, and this is when you talk finance, you have to be very unemotional. When you look at capital preservation, please understand how to add the inflation amount. Add your lifestyle inflation to it and any other possible inflation to form that final kitty, and hence, a fair amount of it has to be balanced in growth assets to keep that increasing rate intact. So, capital preservation should not be in any place which is not beating inflation. Any place that does not beat inflation is a loss of money. So, in pursuit of capital preservation, we don’t risk parking our money in that place where we are unaware and subconsciously losing money. That is far more dangerous than anything else. You’re losing money.
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Kamlesh Rao: I want to challenge the question that you asked him. Why is it the obsession that you have to leave something behind? I think you have lived here, done enough for people, and taken care of your responsibility. That is what the conflict is. And if that is something, we have to get into our minds to say you’ve done enough. You’ve taken all the loads possible and done all the education requirements for your kids. I think your focus shifts to emotions. Now you want to live your life. In retirement, that should be your focus to optimise whatever you have done. So, leaving behind something is fine. There is no single instrument that can take care of that.
A lot of people here will be high on equity. Depending on your risk profile, you say I’m an equity guy, somebody’s a mutual fund guy. Somebody says I’m a fixed deposit guy. And I have done all of it. And I’m only saying that for retirement planning, I don’t think any of them individually will take care of your requirements; you will need a bit of equity; equity will always give you, in 10 years, a great return. But if you go back, there were two years during COVID where you saw nifty fall. This means your money will be at that level in a post-retirement phase for two years, so you have to wait; you can’t draw from there; you need something else to remove from. That is why you will need perhaps dividend-yielding stocks, then. MF and annuities are part of that. So, irrespective of your risk profile, when you are in retirement or life insurance pre-retirement, it will not be similar to your post-retirement; you will need diversification across these asset classes to take care of your post-retirement.
Swarup Mohanty: It’s great to think I leave behind something for my salary. When you’re leaving behind something for whoever, it’s better to ask that person what they want; you think what you want is good for your son, but trust me, your son may not like it. All these need to be discussed with a planner and then taken forward, discussed with your planner so that you know the solutions can be catered to your life.