Retirement Planning: A ‘LIFE-TIME’ Framework That Helps Seniors Earn Risk-Adjusted Return
Retirement planning requires efficient risk management to help your investment portfolio grow and achieve financial goals.
Retirement planning requires efficient risk management to help your investment portfolio grow and achieve financial goals.
Retirement planning
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At 140 million seniors in India account for about 12 per cent of our total population. This number is estimated to more than double to over 330 million by 2050. To put things in perspective the population of the USA is approx. 330 million now. With a falling birth rate, the share of seniors is also likely to grow to 22 per cent of India’s population. Also, over the years, with India’s progress towards becoming a developed economy, life expectancy has increased from 32 years in 1947 to 76 years. With increasing longevity, it is vital to make everyone realise that they need to start their financial planning early, ideally from the age of 40 years onwards. Starting early will ensure they can help secure financial independence to take care of their increasing medical expenses without sacrificing their lifestyle.
On retirement, regular income stops. This makes seniors look for investments that can offer higher returns to compensate for the loss of regular cash flow. This makes them vulnerable as they end up chasing high-return schemes without assessing the fundamental capital protection risk. In recent times, take the instances of PMC Bank or even Yes Bank, where many have had to sacrifice substantial sums out of their golden nest for the lure of higher returns. Instead of taking higher risks, there are other ways by which technology can help seniors increase their returns. For example, opting to invest directly in mutual funds either via the online platform of respective mutual funds or platforms of intermediaries such as Zerodha or Paytm Money provides an opportunity to save on the commission and earn more.
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For retirement planning, it is recommended to adopt goal-based investment strategies which prioritise both the preservation of capital and the generation of sufficient income to support their lifestyle. Designing an effective investment portfolio requires careful consideration of various risks, such as liquidity and financial risks. This article attempts to present a practical framework that presents various alternatives seniors can consider as they plan to optimise returns while mitigating risks in their investment portfolios.
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Retirement planning must focus on the following primary goals:
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Achieving capital preservation, income generation, and growth goals requires a balanced approach. I have designed a LIFE-TIME framework that addresses six unique risks seniors need to consider: liquidity, Inflation, Financial Evaluation, Tax considerations, Income generation, and the need to Maintain the Estate.
Liquidity risk refers to the potential difficulty of converting investments into cash without significant loss. For seniors, liquidity is crucial for covering unexpected expenses, such as medical bills or home repairs.
Strategies to Mitigate Liquidity Risks:
Financial risks encompass a variety of factors, including market volatility, interest rate changes, and credit risk. These can significantly impact the returns and stability of a retirement portfolio.
Strategies to Mitigate Financial Risks:
B. Fixed Income: Bonds and debt funds are typically less volatile and provide regular income. However, interest rate changes can affect their value. To manage this risk, diversify across different bond types and maturities.
C. Alternative Investments: Real estate, gold, or mutual funds can provide diversification benefits but should be cautiously approached due to their complexity and potential illiquidity.
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Generating income and protecting against inflation are critical components of a retirement portfolio. Traditional income sources, such as pensions and Provident Fund, may not be sufficient.
Strategies for Income Generation:
Taxes can significantly affect the net returns of your investment portfolio. Efficient tax planning is essential to maximise after-tax income.
Tax-Efficient Strategies:
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6. Estate Planning and Legacy Goals
Many seniors have goals beyond their lifetime, such as leaving a legacy for their heirs or supporting charitable causes. Proper estate planning ensures these goals are met efficiently.
Key Considerations:
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Designing an investment portfolio for seniors involves balancing the need for income and growth with the necessity of risk management. LIFE-TIME framework helps understand and address liquidity risks, financial risks, income generation, inflation protection, tax considerations, and estate planning; seniors can optimise their portfolios to achieve a secure and comfortable retirement. Regular reviews and adjustments ensure the portfolio aligns with changing goals and market conditions. With careful planning and a disciplined approach, seniors can enjoy financial stability and peace of mind in their golden years.
The author is the founder of Simpli5, which has built a mobile-first platform that brings ease of living by simplifying smartphones for seniors. He has over three decades of C-suite experience across BFSI.
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