How to be happy after retirement

Retirement is a stage in life where you need a steady income to support yourself and your spouse, while maintaining the desired standard of living. When planning for retirement, a moot question stares at us - how much is enough?

Though we can draw up a plan that includes future cash flows, accumulation and spending assumptions, it is not always possible to accurately assess this amount, especially as there are other variables like expected rate of returns, inflation and taxes that also need to be considered.

There may be constraints in saving the desired amount of money on a regular basis for retirement. Hence, it is possible that you may not entirely be able to depend on the returns from your investments. Creating alternative income sources, hence, is a must.

There are usually three income sources during retirement:

Self-created or employer sponsored retirement plans

Returns from investments

Working during retirement

Unless one creates a sufficiently large corpus, it is difficult to survive on a single source. Most retired persons depend on at least two of the three sources. Let us look at each such source in more detail.

RETIREMENT PLANS:

Employer Sponsored - There are many ways an employer can set up and sponsor retirement plans and accounts for its employees. These plans can be broadly divided into defined benefit and defined contribution plans.

Defined benefits plans are those which offer the employee a fixed pre-determined amount, linked to the salary. This is generally paid as a monthly income for life, with a certain portion allowed to be commuted or received as a lump sum. For instance, the employer cuts a defined portion of annual salary to provide assured pension.

In defined contribution plans employees do not get a guaranteed income payout on retirement. The regular contribution is invested in various permissible instruments. The returns of these investments determine the retirement benefits.

Such plans are funded through employer-employee contributions. Increasingly, pension schemes are moving towards this system, creating more uncertainty for a person planning his retirement.

There are other employer sponsored retirement benefits too, such as gratuity and voluntary retirement schemes.

Self-Created - The most common and popular scheme in this category is the public provident fund (PPF). Besides this, other popular avenues include insurance companies' retirement plans, which provide pension plans and annuities.

RETURNS FROM INVESTMENTS

Apart from the retirement plans and accounts mentioned above, an individual would need to make separate personal investments to plan for their retirement

A few popular investment avenues are:

Direct equities or equity mutual funds - This is an asset class one should opt for superior returns over a longer period. Equities become more attractive due to the tax exemptions on dividends and long-term capital gains.

Bonds and debt schemes of mutual funds - Ideal for conservative investors looking for a steady income without much volatility of invested capital. Long-term capital gains are taxed at lower than marginal tax rates.

Bank deposits - Another safe bet for the cautious investor. However, income is fully taxable at marginal tax rate.

Rental income - This is an ideal retirement investment. While property purchased tends to appreciate in value over the long-term, it also yields a good rental income. Moreover, real estate also gets lower than marginal rate of taxes on long-term capital gains.

Reverse mortgage loans - For those people who do not have adequate income to support themselves in retirement, this proves to be a decent source of regular income.

The following factors should be considered while selecting investments for retirement:

The potential income and capital appreciation, pre-and post-retirement

Your time horizon and whether the investment avenue matches it

The costs that you have to incur to service the investment, for instance, annual fund management charges

Liquidity of the investment

Whether the investment matches your risk-return profile

The tax implications or benefits on the investment at maturity/sale.

WORKING DURING RETIREMENT

While the idea of working during retirement sounds paradoxical and may not seem palatable to some, it may be necessary to manage your expenses. One could take up a part-time job as a consultant or freelancer, or start a small business.

Even if they do not need the money to make ends meet, many take up some assignment to stay busy, productive and to boost their self-esteem. Others just see it as a hobby, which also helps generate some extra cash!

The writer is director, Touchstone Wealth Planners