Has COVID-19 Derailed Your Retirement?

Jul 18, 2020

The COVID-19 pandemic has stalled economic activity at an unprecedented scale globally, affecting the lives of individuals in almost every age group. A recent report by the economic wing of State Bank of India suggests that due to the pandemic, India's per capita income is likely to decline by 5.4% in FY 21 to Rs 1.43 lakh from Rs 1.52 lakh in FY 20.

Another survey by The Economic Times conducted in May showed that as many as 39% of the respondents are facing salary cuts, while 15% are set to lose their jobs. This financial stress can derail your retirement plans.

Since retirement is a crucial aspect of one's financial planning exercise, it is important to review your retirement plan amid the crisis and rebalance your portfolio if necessary.

For the young working professionals, it will be easier to recover from the setback. However, if you are middle-aged or nearing retirement you may have to readjust your plan to accumulate the desired retirement corpus.

Retirement planning is not a 'one-off exercise'; rather, it is an ongoing and lifelong process and must not be postponed due to unanticipated events. A prudent retirement plan demands years of commitment in order to enjoy its reward during the golden years.

How have various asset classes fared since the virus outbreak?

As the pandemic wrecked havoc, economic prospects grew bleak, creating panic among investors. This led to a massive selloff in equity and debt markets across globe.

The Sensex crashed to its 4-year low level of 26,000 in March, while the fall in the mid-caps and small-caps has been even more noticeable. The market has since recovered significantly on the easing of lockdown restrictions, stimulus from the government and central bank, and in hopes of a vaccine; but it is still down 14% from its all-time high.

Table 1: Impact of falling returns on retirement corpus

No of years to retirement 35
Annual Investment (Rs) 1,80,000
Rate of Return
12% 77,699,429
11% 61,486,120
10% 48,784,386
9% 38,827,936
8% 31,017,025
This table is indicative and for illustration purpose only.
(Source: PersonalFN Research)

The debt market too has been rife with growing risk of defaults by corporate. However, some safer categories of debt funds such as Banking and PSU debt funds having higher allocation to government and quasi-government securities provided some solace to investors.

Interest on small saving schemes such as PPF, SCSS, NSC, SSY are on the downward trend since the time RBI started cutting policy rates to address growth concerns amid the standstill in the economy. However, they still offer higher returns than Bank FDs.

Gold, on the other hand, which seen as safe haven in crisis emerged as a true winner appreciating over 40% in less than a year's time.

How to approach retirement in times of crisis?

  1. Consider postponing your retirement

    Due to the decline in income levels as well as lowering returns amid market turbulence, it may not be a bad idea to postpone your retirement by a few years to recover from the setback and lead a comfortable retiree life.

    Table 2: Impact of willingly postponing your retirement and accumulating more through SIP

    Age Mr A Mr B Mr C Mr D
    30 30 30 30
    Retirement Age 63 61 59 57
    No of Years to retirement 33 31 29 27
    Rate of Return 12% 12% 12% 12%
    SIP Per Month 20,000 20,000 20,000 20,000
    Total Investment 7,920,000 7,440,000 6,960,000 6,480,000
    Retirement Corpus 101,879,962 79,808,090 62,425,032 48,734,725
    This table is indicative and for illustration purpose only.
    (Source: PersonalFN Research)

    Consider the illustration above where Mr A, B, C, and D are 30-year-olds. While Mr D aims to retire early at the age of 57 years, Mr A is willing to work until 63 years. Mr B and Mr C aim to retire at the age of 61 and 59 years, respectively.

    You will notice that every additional 2 years of delay in retirement makes a difference of 25% to the portfolio value, assuming it grows at a CAGR of 12% p.a. Thus, if you consider delaying your retirement even by a couple of years, it can significantly increase the eventual retirement corpus.

    All of us have a certain retirement age in mind. Some may be willing to work till the age of 60 or beyond, while some may have the desire to retire at the age of 50. If you do not intend to work longer than your set retirement age due to plausible personal choices, consider saving and investing more over the next few years.

  2. Review and rebalance your portfolio regularly

    Amid the uncertainty and volatility in the financial market, it is possible that an asset class in your portfolio has drifted significantly away from the initial allocation due to appreciation / depreciation in its own value or appreciation / depreciation in the value of other assets. If you do not rebalance your portfolio from time to time, it is possible that it might not yield the desired results. There is a possibility that your unbalanced portfolio may be skewed towards a particular asset class, exposing you to a concentration risk.

    Diversifying your retirement portfolio across assets offers you a lot of leeway to counter market uncertainties. Therefore, follow a proper asset allocation strategy and rebalance portfolio if necessary.

    Table 3: Asset Allocation Strategy based on Age and Time Horizon

    Age Time Horizon Equity Debt Gold Portfolio Type
    Less than 45 years 15 to 35 years 90% to 100% 0% to 10% 0% to 5% Aggressive
    45 to 60 years 5 to 15 years 70% to 80% 15% to 25% 0% to 5% Moderate
    Above 60 years Up to 10 years 35% to 50% 50% to 70% 0% to 5% Conservative
    This table is indicative and for illustration purpose only.
    (Source: PersonalFN Research)

    You should rebalance your portfolio when:

    • Deviation of a particular asset class touches the pre-set limit

    • Change in the outlook for a particular asset class

    • Your financial circumstances changes

    • Readjustment of your financial goals

    • You make any kind of windfall gains or losses

    • As you approach your retirement

    While you should aim to stick to your standard allocation, you should consider rebalancing whenever any of the asset class in the portfolio witnesses a deviation of +/- 5% from its standard allocation.

  3. Reassess your risk profile

    Even if you have done your risk assessment in the recent past, it makes sense to do another given the current uncertainty in equity markets. Possibly, you may have underestimated your true risk appetite, i.e. the level of risk you are willing to take, when the markets were showing positive sentiments.

    Any slip up in assessing your risk tolerance level may lead you to invest unreasonably or more aggressively than you can afford to. You could realise your true risk taking ability only when you see the markets moving downwards.

    In the current scenario, it would be wise to tap opportunities in beaten down assets, only if it is in congruence with your risk profile and if you have the advantage of time, say at least 5 to 7 years on your side.

  4. Avoid dipping into retirement savings

    Amid the pandemic crisis, many employees dipped into retirement savings to ease their financial crunch. Ideally, you should avoid using your retirement savings for any other purpose. It would be advisable to maintain a contingency reserve worth at least 6-12 months of your expenditure to deal with unexpected expenses.

    Lastly, continue investing even during your retirement. Many individuals think that they should switch to overly conservative investing style once they retire. Some investors even move their entire portfolio towards fixed income instruments and cash. What they often forget is that while they are retiring at 60, they have to fight the inflation bug for another 15 to 20 years (considering their life expectancy of 75-80 years).

    Therefore, manage your retirement sensibly, so that your portfolio remains safe and at the same time keeps pace with inflation.

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Warm Regards,
Divya Grover
Research Analyst

 

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