What are post-retirement risks and how to overcome them?
NEW DELHI: Post-retirement risk refers to a potential risk to financial security that one may experience after retiring. Reduced income, unexpected illness in the family, and rising inflation are all examples of post-retirement risks. In addition, an overall increase in life expectancy, or a sudden market drop could have a financial impact on your retirement plans.
While most of these exist while you are working as well, there are some concessions you can make to prepare for uncertainties later on in life:
Investing in inflation-beating instruments
What makes matters complicated is that everyone knows and is ready for a reduced income post retirement. However, most people don’t take into account inflation and unforeseen emergencies like medical conditions and sudden family emergencies. These are some of the risks that many people don’t calculate or plan for.
Even though many people may have a contingency plan in place, the question is – does the amount that you have in hand and the amount you need, match? Significantly higher medical costs can increase the risk of dipping into your retirement corpus. It’s important to find a way to overcome this.
Inflation is an important aspect of overcoming post-retirement risks. “Lifestyle inflation eats into the savings available for retirement, so you need to ensure that your investments grow at a faster rate than inflation. One rule of thumb suggests building a retirement nest of at least 25 times your annual expenses at the time of retirement,” said Prateek Mehta, Co-Founder and CBO, Scripbox.
Creating a source of passive income
One of the ways to overcome this is by creating a source of passive income. Once an active salary ceases to exist, one can create passive income through dividends through their investments or annually they might get a yield from their investments.
Santosh Joseph, Founder and Managing Partner Germinate Investor Services LLP said, “If you can create a corpus large enough and if you can create an income coming out of your corpus without dipping into the corpus, then there seems to be a hedge i.e. you are living comfortably within the income your post-retirement corpus generates and if there is an emergency, you can dip into this. There again you can figure out a good mix of investments vis-a-vis risk and rewards so that you have growth, you have a passive income coming in and you are living well within the means of passive income.”
