How to use your retirement money

While cracking their retirement nest egg, people need to strike a fine balance between safety and liquidity. To meet their monthly requirements, they need to invest in schemes that deliver regular income either by way of dividend or interest. Once this is done, the balance needs to be invested in other debt and equity options.

Common retirement mistakes. People usually invest their entire corpus either in a current or savings bank account. They need not do so because now there are options that provide better returns and also provide liquidity. In India, people lay a lot of emphasis on safety of their investments.

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What to do

• Invest about 20-25 per cent of your corpus in liquid funds or FMPs
• You can also opt for short-term fixed deposits in banks
• You can go for reverse mortgage to enhance retirement income
• Invest a part of your portfolio in equity to hedge against inflation

In the process, the yield is sacrificed. One should, by all means, think about safety but that doesn't mean that a 60-year-old, who has a huge corpus, can't invest in equity. He can always invest a small portion in equity. The mistake people make is to totally shun equity.

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Another mistake people make is that they don't plan for their medical care. One should start planning for medical cover early in life as it gets costlier as you grow older. People also often don't reinvest the savings they make from the monthly returns, after meeting their monthly expenses. It is possible to make that money work for you as well.  

How to use your retirement money. You can begin by investing about 20-25 per cent of the retirement corpus in a liquid fund or a fixed maturity plan offered by mutual funds. In case you want to park your money in a bank, opt for short-term fixed deposits instead of a savings bank account.

Another option is to invest in a mutual fund scheme that offers a regular dividend payout. This will provide you with liquidity. While investing in mutual funds, consider factors such as the track record of the fund, ownership structure and size.

Bigger funds usually perform better than smaller ones, as they need to maintain their reputation. Don't get bothered by the daily market fluctuations. I believe that the Indian economy will continue to do well and downturns will be temporary. This is also the reason I advocate exposing only a small portion of your portfolio to equity.

Reverse mortgage. You can now pledge your house for reverse mortgage at a later stage in your life to enhance retirement income. It is a very good option for retired people. It is a very well developed product in the West, but in India, the market for the product is not yet developed. However, the legal framework is in place.

Inflation. Inflation gradually chips away the purchasing power of your retirement corpus. The only way to hedge against inflation is to invest a certain portion of your portfolio in equity. When you invest in equity, don't do it directly. Do it through mutual funds or insurance products.

Other than equity, there is no financial product available in the Indian market, which can hedge against inflation directly. Nobody is planning to introduce inflation-indexed bonds or similar instruments in the country yet. Also, markets for such products are not developed in India. And even if they do develop in future, the cost of hedging will be expensive.

Start Early. An essential prerequisite for you to be able to do what I have recommended above is to not postpone planning for retirement till you are 60. My first advice would be that you start planning for it from the first day of your first job.

As told to Pankaj Anup Toppo