Retirement Fund should Give Positive Real Return





Plan well to earn post-tax gains that beat inflation, clear debt before calling it quits

Any discussion relating to retirement in India almost surely brings in the twin aspects of high rate of inflation and the increasing life expectancy.

High rate of inflation in the country is the result of several factors, including the fast growing economy that India is, and also demand and supply issues which are unique to us. The increasing life expectancy, on the other hand, is mainly because of the advancement of medical science and people being more conscious about various health issues. However, when these two issues --higher inflation and increasing life expectancy -are combined, things could turn tough for people who are on the verge of retirement and also for those who have just retired.

According to financial advisors, if the retirement corpus is not used well, which includes putting in place a plan for its growth and also utilization, there is every possibility that over the long life of the retired person, high rate of inflation would either force the individual to deplete the retirement corpus slowly over the years, or he/she may have to compromise on the quality of life. A combination of the both is also possible, they say .

Let us see why this is a possibility. Suppose you have just retired and your family's monthly expenses on the necessities are Rs 10,000. The rate of inflation is 10% per annum while the rate of return that your retirement corpus generates is 9%. At this rate you are falling behind the rate of inflation by a percentage point. The situation could worsen if your investments are in such instruments returns from which attract income tax. Post tax, post inflation rate of inflation could be lower by more than one percentage point.

If your retirement corpus is large enough to meet the your monthly expenses after accounting for the rate of inflation, tax outgo and still leaves you with something extra to invest every year, that is the ideal situation. However, for most just retired or soon-to-retire people, that is not the case. Only a select few are found to be in such a sweet spot. Others need to plan a bit to be in a sweet spot and enjoy the post-retirement life.

There are some easy to follow steps that the soon-to-retire or just retired individuals could follow for a smooth life during their sunset years.

Foremost is that you should plan your investments. Your retirement corpus should be invested in such a way that there is regular flow of income and the principal amount grows for at least the next five years. Financial planners say in case you are not competent enough to plan how and where you should deploy your retirement corpus, it is better to seek professional help.

The retiring person should compute the cash flow. Get used to maintain expenses and income from your investments in a cash flow statement. This statement will track the savings on hand at end of every month which can be used in investments.

After, analyzing the statement you can control unnecessary expenses in a month. Keeping this record will make it easier to analyze your financial situation at end of first year and you can make adequate changes in lifestyle and expenses to plan the future.

The next step is to get rid of debt before retirement or as soon as possible. You should plan to get close out all loans before retiring. Understand at this age you require sources of regular income and not to take up regular outflow to pay outstanding loans.

The next step is to analyze your insurance needs since nowadays the rising inflation impact medical costs. "A medical insurance is a must for you and your spouse. Maintain a record of each medical policy with its coverage, premium due dates and renewals. Also be alert to no-claim bonuses, if any.

And last but not the least: Keep alive your old networks. It could happen corpus created is not adequate to take care of your lifestyle and expenses for the long term. So, it's better to join back the last employer as a consultant or work part time. Take up a work which could interest you like training or a hobby which leads to a source of income after retirement.