Upon retirement, many individuals assume that their financial risks should diminish along with their salary. This often leads them to favor fixed deposits and debt funds over equities, with only a small portion allocated to stocks. While this strategy may seem secure at first glance, financial experts warn that it comes with a hidden drawback.
N. ArunaGiri, CEO of TrustLine Holdings, pointed out a fundamental flaw in this conventional approach. “Returns on deposits and debt instruments, after taxes, frequently fail to outpace inflation. This gradual erosion of purchasing power undermines the compounding potential of retirement savings over time,” he explained.
He emphasized that relying heavily on low-yield investments traps retirees in a cycle where returns struggle to keep up with escalating living expenses. Therefore, he advocated for a different perspective on managing retirement funds.
Instead of allocating the majority of funds to fixed-income assets, ArunaGiri recommended that retirees set aside only three to four years’ worth of essential expenses in easily accessible, low-risk instruments. This portion, according to him, serves as a financial cushion that remains stable even in times of economic downturns or market fluctuations.
He proposed that the remaining funds be strategically invested in equities and other assets geared towards growth. “This approach safeguards immediate financial needs while allowing the remaining funds to grow over the long term,” he stated. By protecting short-term requirements, retirees can avoid premature withdrawals from equities during market downturns, which often lead to long-term financial setbacks.
ArunaGiri recommended that retirees reassess this strategy every three to four years. This periodic review enables them to replenish the emergency fund and realign the growth portfolio based on changing expenses and market conditions. “It presents a straightforward yet effective method to ensure that retirement savings are resilient to economic downturns,” he added.
Financial planners familiar with similar international models noted that this approach avoids the pitfalls of two common extremes that many savers fall into. A portfolio solely composed of deposits struggles to combat inflation, while an equity-heavy portfolio induces anxiety during market downturns. A blended approach, with a portion of expenses set aside in liquid assets, provides retirees with the flexibility to allow their remaining funds to grow steadily without succumbing to panic.
As life expectancy increases and retirement spans two or three decades for many Indians, experts emphasized the growing importance of long-term compounding. Merely seeking safety is inadequate for portfolios intended to last for twenty or thirty years.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)