Investment strategies in retirement

For many people, retirement is the end of earning period, unless someone opts for self-employment. Every retiree wishes to make the best possible use of the retirement corpus that he may have accumulated over his/her earning period, which would help them reduce tax liability and provide regular income till his/her survival.

However, there is a conflict between the need for safety and the need for growth to hedge inflation over the life of the retiree. This is because, inflation and interest rates closely track each other and the value of retirement corpus over the life of the retiree will eventually start diminishing with a zero-risk investment portfolio, even if a retiree considers modest withdrawals. This is for sure that zero-risk portfolio practically won’t be able to achieve reasonable financial goals. At the other end, not only equity portfolio comes with high expected returns but also carries volatility, which eventually would risk self-liquidation if the withdrawals are continued when the markets are down. So, this calls out for an appropriate investment strategy which would have the right mix of assets based on individual risk profile and help the retiree not only get the desired withdrawal but also ensure his/her survival.

Systematic withdrawal strategy

This is one of the most popular strategies adopted globally. It involves investing in assets such as equities, debt, gold, etc. and then selling them periodically to generate cash flows and the rest remains invested. Systematic withdrawal strategy takes a total-return approach, which seeks greater long-term returns with portfolio rebalancing done periodically. Here, the withdrawal rate depends on the risk appetite, returns on investment and time horizon. This strategy is similar to the popular four per cent safe withdrawal rate strategy wherein, with a portfolio of 50 per cent equities and 50 per cent debt for 30 years, an investor can withdraw four per cent inflation adjusted and can easily survive for the period. The 4 per cent safe withdrawal rate strategy is popular in United States and is based on their market scenario. However, Indian markets are quite different than the developed US markets, where inflation is low and even the returns are low, as compared to India.

Flooring income strategy

This is an investment strategy wherein, your retirement corpus is divided between your needs and wants. This strategy is completely different from the risk and returns investment strategy adopted by the systematic withdrawal strategy. The flooring income strategy believes that the needs in the retirement should come from a secured source whereas, the rest should be invested in equities. This strategy assumes that you can risk the non-needed part.

Bucket Investment Strategy

Bucket strategy is something which is more related to emotions and psychology wherein, different buckets of goals are created based on the duration and then investments are made or allocated depending upon the duration left for the goal and risk profile of the investor. Therefore, it is also known as time segmentation strategy. Say for instance, you have certain financial goals in retirement like, regular income, vacation, medical, charity, etc and all are spread across several durations. Some are for short durations, some for medium and some are for long duration. For short duration goals, investments are made in secured instruments, for medium duration goals, investments are made in a mix of secured and growth instruments and for long duration, growth investments are preferred.