How to select the right investment product for retirement income

Ishaan has recently retired from service. He has accumulated a good retirement corpus and now needs decide on how to invest it. He has been hearing about the returns people have made in crypto and gold and real estate as an asset appeals to him. He has also been seeing advertisements of high return corporate bond issues and his relationship manager in the bank has been talking to him about mutual funds.

Ishaan is clear that safety of the investments is important since his earning years are over. While he is able to understand the features of products when they are explained to him, he is unable to decide whether it is suitable for his needs. He would like to simplify things in his mind so that the selection is easier.

Ishaan needs to get clarity on his needs at this stage to make the right product choice. The primary pegs to investing in retirement are income and flexibility. The investments that Ishaan selects must provide a periodic income that is adequate for his needs.

Moreover, he must know the amount and periodicity of the income to be able to plan his cash flows in a way that money is available when needed. Investments such as gold generate no income, while the return from investments in real estate and equity is more from capital appreciation. These investments may not generate income with the regularity and predictability that he will require in retirement.

Ishaan must evaluate products with different characteristics but with income as the primary return. Some products may come with guarantees, such as government guaranteed schemes and bank deposits but may have lower return and liquidity. Others such as bonds of companies may offer higher return but carry a slightly higher risk of default. Some may give market-linked returns but without the predictability essential for him to plan his cash flows.

The taxability of the income generated is another important feature that he must consider since the post-tax income is what will be available for consumption. The choice of investment and structuring the return should be done with the view to enhance post-tax returns.

The flexibility of the investment portfolio to respond to changing circumstances in retirement is an important factor in selecting investments. Flexibility may be in terms of the amount of income generated, how the income is paid out, the liquidity that can be generated, and transferability of the investments.

To ensure this, Ishaan must not tie up large sums of retirement funds into one or few investments. Instead, the retirement portfolio must hold a combination of investments which will give him the scope for re-organizing his portfolio as required. The retiral income must be drawn from multiple investments with diverse features so that he is able to balance the income with safety and flexibility in the retirement years.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.

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