How can individuals nearing retirement prepare for economic slowdown?

Capitalstars Investment Advisor

InDon’t panic. The immediate step should be to secure near-term liquidity needs.

If you are on the verge of retiring, the ongoing slump in the economy couldn’t have come at a worse time. That nest egg you are counting on for support may suffer a crack or two in the face of an extended downturn. How should individuals nearing retirement prepare themselves?

Financial planners say those nearing retirement should not fret. “Many forget that retirement planning doesn’t actually end upon retirement,” says Suresh Sadagopan, Founder, Ladder 7 Financial Advisories. “It is an ongoing exercise that extends for 20-30 years. From the longer term perspective, the current scenario doesn’t really matter,” he insists. Planners say individuals need to assess their personal situation and not be influenced by how the market is shaping up.

The immediate step should be secure near term liquidity needs, says Rohit Shah, Founder & CEO, Getting You Rich. “Start building a liquid position in your portfolio to cover your needs in the initial years after retirement,” he says. This money can be kept in liquid funds. Retiral benefits like Provident Fund or superannuation corpus can be partially directed towards providing a steady income. Those with rental or pension income will be in a better position to address immediate liquidity needs.

With the rest of the retirement corpus, one should continue with the asset allocation approach. “The key is to maintain discipline in asset allocation,” asserts Tarun Birani, Founder & Director, TBNG Capital Advisors. It is advisable to gradually bring down allocation towards equities as one nears retirement. However, taking equity out of the equation altogether can be counter-productive.

Notwithstanding the current slump, equity is the only asset class that can convincingly beat inflation over the long run. “There is no need to shift entirely to fixed income. While more protection is prudent, your savings should also grow enough to outlast inflation over the next 25 years or more,” Birani says. Depending on the risk profile, individuals may persist with 20-30% allocation towards equities. “One can start getting defensive within equities,” suggests Shah. “If you have taken an aggressive approach so far, consider moving partially into lower volatility equity funds,” he adds.

Sadagopan suggests retirees stick to equity hybrid funds, with some presence in large- or multi-cap funds. “Don’t venture into mid- or small-cap funds if you are nearing retirement,” he cautions. It would also be wise to be cautious within the debt segment. “Stay out of the credit space. Stick to banking & PSU funds that boast the highest grade credit quality,” suggests Birani.

Individuals who have planned for retirement through prudent asset allocation should face no major hiccups. Only those who expected aggressive returns may have to go back to the drawing board. For instance, investors who estimated 15% or higher annualised return from their equity funds will have to do a reality check.