Dramatic advances in healthcare have extended the lives of people, predominantly, in developed countries. Without adequate personal savings or pensions, people could easily outlive their retirement funds! In times of economic downturn, people may choose to come out of retirement and re-enter the workforce on a seasonal, part-time or full-time basis to earn income that helps meet their changing lifestyle needs and, more importantly, to have sufficient funds for medical care.
With declining interest rates and fixed-income investment options providing interest returns lower than inflation, many retired investors have sought to redesign their retirement strategies to provide for inflation and tax-adjusted cash flows.
Retirement is one of the trickiest financial goals because it spans over 10-50 years, during which time there are various risks pertaining to interest rate hikes, inflation and medical and disability illness, among others. Besides, there are non-financial aspects to be considered, like emotional and community needs, family dependency, and social and philanthropy needs.
Once the retirement accumulation phase investments are available for distribution, an investor should ideally take the help of a financial advisor to evaluate each asset with its implication on returns and tax for formulating a retirement distribution strategy. Further, a financial adviser must envisage future changes in interest rates, taxes, market risks, reinvestment risks, lifestyle changes and any miscellaneous expenses arising due to unforeseen circumstances, such as illness and hospitalization or travel, to help design a strategy that can ensure a comfortable life for the investor during retirement.
At Dilzer Consultants Pvt. Ltd, we provide our clients with an eight-point retirement withdrawal strategy that considers factors such as the corpus accumulated at retirement, risk profile, income level and the needs of the client and stage of retirement (early, mid or late stage), .
While fixed income options are good, it is not always the best option if one takes into consideration the taxation, and frequency of withdrawal of funds to meet a retiree’s needs. Since the retirement goal is long, we consider a bucket strategy of allocating investments in buckets of 3-5 years depending on the instrument being planned, its cash flows and liquidity features.
The objective of regular income can be met using a combination of systematic withdrawal plans, tax-free cash flow options, fixed income options, annuity, dividend yield options, government savings, and some strategies around leveraging the features of certain products that are tax efficient.
It is to be understood that no single investment strategy works best and an ongoing evaluation of the same has to be made by the adviser and client.
An important aspect that is ignored while considering the retirement corpus is a separate medical corpus, aside from medical insurance, to take care of outpatient costs like dental surgery, knee surgery, or any minor treatment which is not covered under health insurance and having an emergency fund in place to take care of contingency risks.
A scenario analysis of the extent of the assets available and cash flows need to be planned depending on the needs of the client. Some clients want an estate to be created for the next generation, while some prefer consuming the benefits in this lifetime. Philanthropy and social investing also need to be catered to for some clients. Estate planning and having a will or a family trust in place depending on the client’s situation, objectives and needs has to be an important consideration in the retirement phase.
Investopedia shows an interesting statistic that the younger generation is expected to stop working earlier. Compared to Gen X (born between 1965-1981) whose media age to stop working is 64, for Gen Z (born between 1996-2010), it is 57. This means their retirement distribution phase will last longer and bring with it uncertainty. Therefore, it is important to consider the longevity risk while working with different clients.
In conclusion, it is important to consider the rates of interest for withdrawal of funds, and frequency of such withdrawals to meet daily needs of the retirees. Advisers should also take into consideration the probability of the client exhausting the corpus during the retirement phase, and the extent of funds required to cater to longevity risk and a separate financial plan in the instance of the death of the spouse.
Asset allocation forms the basis of retirement distribution strategies as well and requires attention in planning.
Dilshad Billimoria is founder, Dilzer Consultants Pvt. Ltd, a Sebi- registered investment Adviser
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Updated: 17 Oct 2023, 08:28 PM IST