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The Senior Dilemma

Seniors who can handle some volatility should look beyond conventional investment wisdom…

Some days back, I received an email from a man in his early sixties asking for some post-retirement advice. Nothing remarkable about that, expect that this senior (or soon-to-be senior, depending on your perspective) had a problem that was the exact opposite of what you would conventionally expect from someone approaching retirement. His basic problem was that he had no problems. He had no liabilities, had adequate savings and essentially needed to figure out an investment portfolio that would take care of his own expenses to the end of his days.

This isn’t such an unusual case. With increasing economic prosperity and better healthcare, there are a good number of people who find themselves in this happy position. Many of them are retiring from senior level corporate jobs. Some have got nest eggs generated by old real estate holdings and others have moved out of family businesses. Whatever be the source of their prosperity, their relative affluence leaves them with a problem—none of the conventional financial advice that is given to senior citizens makes much sense for them.

The standard advice given to retirees is that they should put a bulk of their money into safe, fixed income investment avenues like banks and various government backed deposits. In mutual funds, they would generally be advised to invest in Monthly Income Plans (MIPs). Not only is such advice not inappropriate, it is actually dangerous.

Safe, fixed income returns in our economy do not come close to even matching up to the real inflation rates (specially with medical expenses included). Someone in their early sixties could easily have another twenty to thirty years to live. That’s a long time, not much shorter than the actual working lives of most people. If the safe rate of return has a lag of just 2 per cent from the real rate at which your cost of living goes up, then in 25 years, forty per cent of your money would be eaten away. That’s what a safe investment will do for you. In reality, seniors who can take a little bit of volatility have no option but to abandon conventional wisdom and look at equity-based investments seriously.