The number of equity investors (stocks + mutual funds) in the last 5-7 years has increased dramatically. Most of these investors are young and have much to learn about market risk vs reward. Meanwhile, there is a silent transformation underway. More and more Indians are retiring in their 50s with higher and higher capital market-linked exposure (stocks, bonds, commodities, REITs/InVITs).
This is the great Indian retirement transformation. We are not trying to claim everybody will retire with an ample corpus. Just that there will be a shift in the way Indian retirees would invest.
The traditional retirement portfolios are usually dominated by pension and small saving scheme payouts with a little corpus kept in fixed deposits. The new retirement portfolio has a pension as a component and not the dominant entity. The market-linked component is only going to increase in future. The National Pension Scheme will play a bigger and bigger role in future.
No, I am not referring to only the “rich retirees”. Gradually the trend is catching on among the self-anointed “middle-class”. As always, change comes this consequences, and I fear more bad than good.
Consequences of the great Indian retirement transformation
Many senior citizens with no prior capital market experience already invest in equity mutual funds and debt mutual funds, often with incorrect perceptions of risk and reward. This is only going to get worse.
DIY investors may be influenced by their pre-retirement capital and take on too much risk after retirement. Capital market exposure can quickly deplete a corpus if the initial withdrawal rate is 4% or more. A higher corpus alone is not a safeguard in retirement. A conservative approach is essential to tackle the sequence of returns risk. The freefincal robo advisor tool mitigates sequence risk with a unique bucket strategy model that considers existing income sources. It also has multiple options like income flooring and laddered annuities.
Indian financial advisors do not have experience (both in duration and number of clients) handling a market-linked retirement corpus. They will learn hard lessons in the future, especially if they are too enthusiastic about equity and expect significant positive real returns in retirement. It is critical for investors to work with conservative advisors who do not recommend too much equity after retirement or risky products. Our 11-year-old curated list of SEBI-registered flat fee-only advisors is a good place to start for those seeking guidance.
In summary, the great Indian retirement transformation is a mixed bag. One must not take on too much risk by looking at past market performance. A single slip-up (crash and/or poor returns for years) can quickly and irretrievably destroy our retirement dreams. We can be conservative after retirement only if we are conservative today. To do this: – underestimate returns with reasonable inflation estimates, increase investment as much as possible each year and use a robust equity de-risking strategy.
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Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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