By Dr Arindam Banerjee
Stocks, bonds, currencies, and even real goes through volatility. Retirement calls for a steady income that beats inflation. There are several ways to save for retirement in India, such as the National Pension System, (NPS), the Employees’ Provident Fund and Voluntary Provident Fund (EPF/VPF), the Senior Citizens’ Savings Scheme (SCSS), the Pradhan Mantri Vaya Vandana Yojana (PMVVY), RBI floating rate bonds, and FD/Post Office ladders as some of the common ones.
Globally, one can find Inflation-linked bonds such as the like US Treasury Inflation Protected Securities (TIPS) and UK index-linked gilts, government bond ladders, and instant and deferred annuities are comparable to Social Security and State Pension. So how does one plan for a retirement corpus.
The Three-Bucket Strategy for Retirement
Let’s start with a three-bucket list. Bucket 1 should include cash, liquid funds, and very short-term loans for the next 0–3 years. The goal is to balance out losses without selling stocks that are too risky. Bucket 2 should include short- to medium-term funds, Government Securities (G-Secs) ladders or Treasury bills and short-duration bond funds for 3–7 years.
Bucket 3 should include broad stock index funds (India and the rest of the world), limited Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (InvITs) for income, and 5–10 per cent gold Sovereign Gold Bond and Exchange Traded Funds (SGBs/ETFs) as a hedge for 7 years or more).
Rebalancing and Managing Risk Over Time
It is important to perform a portfolio rebalancing once a year or even every six months. When things are going well, put more money into Bucket 1. When stock prices drop sharply, don’t panic sell. Pick options with low credit risk, like G-Secs, government-backed schemes, target maturity funds related to G-Sec and State Development Loans (SDL) indices, and bank fixed deposits that can be rolled over. Use both short and long times.
As we saw in 2022, bond prices can drop when interest rates rise. Check out short-term, investment-grade bond funds before you go abroad with your money. If you spend Indian Rupee, you should invest in bonds to protect your cash.
Equity Allocation and Inflation Protection
Keep equity that you understand. Most seniors should have 25-40 per cent equity to protect themselves from long-term inflation. As you get older and your “floor” gets stronger, lower this amount. You should choose broad-market index funds with low fees, like Nifty 50/500 plus a global index. Do not bet a lot on the same theme or place.
A Systematic Transfer Plan (STP) lets you move money from cash to stocks over 6 to 18 months so you can get a big sum when you’re almost ready to retire. Keep your health insurance up to date and set aside 12 to 24 months’ worth of fees and projected out-of-pocket costs in a separate account. Family members should talk about long-term care and care plans. Nominations, wills, and Systematic Investment Plans (SIP) always help.
A Sample Retirement Portfolio in Practice
Let’s say a 60-year-old Indian couple with a portfolio worth Rs. 2.5 crore should be able to meet their basic wants with 40 per cent SCSS, PMVVY, and a G-Sec ladder. Also, they should put 10 per cent of their money in cash or ultra-short funds (Bucket 1), 30 per cent in target term funds (Bucket 2), 15 per cent in stock index funds, and 5 per cent in SGBs (Bucket 3). Take out 3.8 per cent the first year, set boundaries, and make changes every year.
Key Takeaways for Long-Term Stability
In conclusion, one should ensure to have a floor, break up the time you have, spread your money out among different countries and currencies, and keep an eye on costs and taxes.
Review it once a year and only make small changes. These ideas can be changed to fit your budget, level of risk tolerance, and the realities of working across countries by a fee-only planner.
(The author is Professor (Finance), Program Director – Master of Applied Finance & Wealth Management, SP Jain School of Global Management)
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