Retirement marks a significant milestone in life, signalling the transition from the daily grind to either a period of relaxation, leisure or a work culture that provides for what one really likes to do in life. At times, even entrepreneurs or consultants are built in this phase. Importantly, it provides a space for what one wants to do in life and at one’s own pace, resulting in financial freedom. However, achieving a comfortable retirement requires meticulous planning and strategic financial management, particularly during the distribution phase of retirement savings. This phase determines how your accumulated wealth will support your lifestyle post-retirement.

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Here are some key strategies to optimise your retirement savings during this critical phase:

Creating a Well-Structured Withdrawal Strategy

Retirement funds can quickly be exhausted by an irresponsible withdrawal plan.

Various strategies that are tax-efficient and inflation-adjusted should form part of the options provided by your financial advisor.

A “bucket strategy”, in which assets are divided into three buckets based on liquidity needs and time horizon, is what we recommend to our clients. The first bucket holds highly liquid assets like money market and Arbitrage funds to cover 1-2 years of expenses. Short-term bonds and deposits to finance the next 2-5 years are included in the second bucket. The third bucket is invested in a combination of active and passive low-cost equity funds and ETFs.

This strategy provides ready cash flow while mitigating the risk of the sequence of returns. The distribution phase should comprise investment strategies that last a lifetime that is until life expectancy is 85-90 years old. At the same time, these strategies should provide for liquidity and, importantly, counter inflation risk. Therefore, an important consideration here is also the Withdrawal Rate from the retirement corpus.

According to the CFA Institute and the BCG Consulting Group, an asset allocation of a 60:40 equity-to-debt ratio using the bucket strategy generated annual returns of 8 to 10 per cent over 20 years, beating traditional withdrawal rates.

Delaying Social Security Benefits 

Delaying withdrawal of lump sums until after 60 years of age may increase lifetime benefits by more than 30 per cent due to delayed retirement credits for the Indian Employee’s Pension Fund (EPF corpus), thereby ensuring the corpus sustains until not only the income earner’s life but also the spouse’s life.

Organised retirement income benefits like EPF and the National Pension System (NPS) in India play a vital role and have proved to meet 60-90 per cent of the corpus requirement at the start of retirement. Therefore, ensuring retiral benefits are used primarily for retirement and not prematurely withdrawn for any other goal or objective is the discipline one needs to adapt to in one’s investment plan. On the other hand, high tax liabilities of over 30 per cent are incurred by an early withdrawal from EPF before the retirement age of 58 years.

Phased Approach to Tax-Efficient Withdrawals

If one’s corpus comprises predominantly organised retirement benefits, then a phased approach for withdrawals, starting from taxable accounts to tax-advantaged accounts like EPF to tax-exempt accounts such as Public Provident Fund (PPF), is recommended to minimise cumulative taxation in the distribution stage.

As per the Economic Times Wealth Analysis in April 2023, a married couple following this method can save over Rs 5 lakh in taxes over 20 years compared to an ad-hoc withdrawal approach.

Annuity Guarantees

Contrary to myths about pension plans, annuities provide a steady monthly income stream to investors until their life expectancy and, further, provide for a corpus to the beneficiary. The risk of longevity can be mitigated, and regular cash flows may be generated by putting part of the corpus into an immediate annuity plan. However, it is important to weigh the cost of an annuity and the stage of life or age of taking an annuity option against the life expectancy, as the return of an annuity may be lower than that of a self-managed investment but provides for a steady income stream.

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Healthcare Planning

With healthcare inflation at 14-40 per cent per annum, a Rs 1 crore corpus can be exhausted within 10-15 years due to spiralling medical costs. To provide sufficient coverage and avoid costly out-of-pocket expenses from undermining savings, enrolling in a health insurance plan for older people before the age of 60 is advisable.

Further, the retirement corpus that is built should be allocated to healthcare costs not covered by health insurance. An important consideration is that the individual takes independent health coverage plans, not corporate health insurance, to tide over the disadvantages of group health benefits covered by a corporate or company-specific risk. The Mint National Retirement Study 2021 estimates that a retired couple would need at least Rs 50 lakh for healthcare expenses over 25 years.

Reverse Mortgage Options 

Reverse mortgages provide periodic payments using home equity without relinquishing ownership until death for immobile, asset-rich, but cash-poor retirees. According to data from the National Housing Bank, in the fiscal year 2022-23, over 800 reverse mortgage loans were issued, representing a 20 per cent annual increase due to increasing customer acceptance.

Continually Rebalancing Portfolio 

Over time, ignoring portfolio rebalancing during retirement can distort the allocation of assets and increase risk exposure. For example, after a bull market phase, a 60:40 equity debt split can move to 70:30, exposing the corpus to higher volatility. The allocation to an original risk profile is realigned by strict annual rebalancing.

Factors to Consider in Retirement Savings Distribution

When crafting your retirement savings distribution strategy, consider several factors to tailor it to your unique circumstances:

Risk tolerance: To find the appropriate asset allocation and withdrawal strategy that fits with your comfort level and financial objectives, you will need to evaluate your risk tolerance and investment goals.

Income needs: To estimate your income needs and determine the best withdrawal rate from retirement accounts, you will need to examine your expected expenses and lifestyle goals in old age.

Tax considerations: Remember that withdrawals from tax-deferred retirement accounts are subject to taxation, including possible taxes on investment profits, social security benefits and the requirement for minimal distribution of RMDs (required minimum distributions).

Longevity risk: When planning for the possibility of living longer than anticipated, consider factors such as inflation and healthcare costs. Ensure that your retirement savings will allow you to maintain a normal lifestyle over all those years.

Market volatility: Anticipate market fluctuations and think about reducing the impact of changes in your retirement income, e.g., diversification or regular portfolio rebalancing.

Retirement planning is not just a number-crunching exercise. There are considerations of emotional, legal, and estate planning issues that an advisor must build with the client and have a conscious and continuous touch point to ensure a customised solution is being provided, monitored, and altered to meet the client’s requirements.

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Conclusion

Managing taxes, cash flows, health care costs, and asset allocation prudently during the retirement distribution phase ensures your savings last through your golden years. Implementing these strategies with personalised advice from financial advisors proves the advisor alpha by sustaining the longevity risk of a retirement corpus.

The author is a Sebi-registered investment advisor and the founder, managing director, and chief financial planner of Dilzer Consultants Pvt. Ltd.