If you’re planning to retire soon or recently retired, you may be getting excited about this next phase of your life. However, your ability to enjoy retirement will depend on the resources you can draw from your retirement portfolio even if you’re getting a pension of your own. Retirement planning is a multi-step process that evolves over time. It starts with thinking about your retirement goals and how long you have to meet them, and culminates with actually enjoying the fruits of your labour over a long period of time.
Your relationship with risk can change noticeably over time. When you started saving for retirement, you may be willing to take on more investment risk, which translated into taking exposure into different investment options available to you for diversifying the risk, including even the riskier classes like equity in a good measure.
Now, at this stage of your life when you’ve just retired or are close to retiring – and, in fact, even during your retirement – you will need some growth-oriented investments like equity to help you stay ahead of inflation. Over time, even a low inflation rate, such as we have experienced in the past few years, can erode the purchasing power of your money.
And the inflation rate going ahead from here could be higher accelerating this speed of erosion!
So, the issue isn’t this: “Should I get rid of all my risk?”
You shouldn’t – and, in fact, you won’t be able to, because all investments, even the ones considered most ‘conservative’, contain some type of risk, even if it isn’t the risk of loss of principal. For instance, some investments run the risk of not keeping up with inflation or are not providing tax efficient/adjusted returns or linked with high lock-in period (illiquid) and penalties ie SCSS, POMIS, PMVVY, PPF, FD, NPS, Real Estate etc – and such risks by themselves are also real, potent risks.
Before seeking investment options for saving for your goals ahead, ask yourself this question: “How much risk am I willing to take within my portfolio, for my upcoming goals and requirements?” Of course, there is no one-size-fits-all kind of available solution.
Since building a retirement corpus for ourselves and our family should be amongst the prime objectives during the earning years, we should always keep in mind that times do change and so does our risk bearing ability. In our initial years, we may be able to take higher risks but the scenario changes when our retirement age starts approaching. In these years, it is best suited to have minimum risk associated with the portfolio. It is a time when we should start rewarding ourselves for the tireless efforts we have put in through our younger years to be at this stage.
You’ll need to look at your investment options to see if they are positioned to provide you with the income (or additional income) you’ll require in your retirement years. You might have initially based your financial strategy on a specific type of retirement lifestyle, but now that you’re nearing retirement, perhaps you would have changed your mind. Your anticipated new lifestyle might require either more or less income than you had originally projected – and if that’s the case, you may need to adjust the risk level in your portfolio or make other adjustments.
For example, suppose you had initially envisioned a rather quiet retirement, sticking around your home, volunteering and spending time with your grandchildren. But in recent years – and especially since the confinement many of us have felt during the COVID-19 pandemic – you may have thought that you’d now like to travel extensively. To achieve this goal, which will likely cost more than your original one, you may have to work longer, or invest more each year until you retire, or seek a higher return from your retirement corpus, as the case be – which means accepting more risk.
As you can see, managing risk is a balancing act – and you may need to make some tough choices. But as long as you’re aware of how much risk you can take, and how much risk you may need to take, all things will keep falling in place. And in case you are new to the world of financial well-being, you can always contact a good financial advisor, who will be more than willing to guide you in your journey of financial freedom.