Nov 22

How to Manage Retirement Funds When interest rate crash.

The most common question that investors ask me is how to manage their retirement funds at a time when interest rates are coming down.

This is a tough question. Those who have not planned their retirement will be hit hard.Many people lose their jobs when they are in their 50s and have major expenses such as the education of their children or their wedding in the years to come.

But this is not a problem for those who have done proper retirement planning.

Investment Plan with Retirement Funds:-

When it comes to investments, most people rightly look for safety and liquidity. But one particular point that most investors miss is that all the retirement money need not be readily available. For emergencies, you may require a certain amount. The mistake that many people who do their own investment without the help of professionals is that they miss this point and invest all the money with liquidity in mind. But remember that when liquidity is high, the returns will be sub-optimal. As inflation races past the post-tax return, the shortfall increases over the years. Later in life, the investors need to dig into the capital just to survive. That is a dangerous situation.

So, what is the way out?

Impact of Down Interest Rates:-

When we talk to clients, we analyze their cash flow and allocate assets based on how much risk they can and should take. One way to keep your capital intact and also earn good returns is through an exposure to mutual funds. But you cannot blindly invest in any fund. Based on complex analyses, we set aside funds in funds ranging from equity to balanced funds. We also arrange for money to be systematically withdrawn every month to meet expenses, if needed.

Strategy To Manage Funds:-

One strategy that we do not recommend is the dividend option. Instead, go in for systematic withdrawal of 8 per cent of the capital to meet living expenses. This plan is suited for regular cash flows requirements. Equity markets by their very nature are volatile and at times reward investors with abnormal returns. During 2003-2007 and in 2013-2015, some balanced funds delivered 25 per cent compounded annualised returns.

If you hope for higher returns, the risk will rise abnormally too. Just taking out the excess profit and preserving it in debt will help one to re-enter when the markets are down. This way, you can increase the capital itself while still meeting the monthly requirements. That’s not possible with plain vanilla fixed deposits.

Here’s what happened with one such balanced fund for an investor. The investor put Rs. 25 lakh in November 2000 and started to withdraw 8% of the capital, that is, Rs. 16,600 for the past 17 years. Yet, he managed to withdraw Rs. 33.86 lakhs–more than what he invested. And the value of his fund today? Rs. 1.86 crore.

Moral: Start investing!

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