Hope to retire some day, but no equity? Think again

The financial goal of retirement has a very long-term investment horizon and equity-based assets are an excellent choice

Hope to retire some day, but no equity? Think again

Hope to retire some day, but no equity? Think again

As a long-term savings project, accumulating savings for retirement is no different from any other long-term savings plan. However, if you talk to conventional financial advisors, you will probably discover that this is a contrarian view. For some reason, there is a school of thought that believes that because one should not take risks with one's retirement savings, one should also not invest savings set aside for this purpose in equity.

The logic at work is that older people are not earning any more, so they can't afford to take any risk. The value of their money must never decline, even if it grows slowly. Once you accept this logic, then the only type of investments that are acceptable are those that offer guaranteed fixed-income returns.

Curiously enough, this view extends not just to investments that actual retirees make, but even to investments that younger savers make towards retirement. These experts think that no one can take any risk with their retirement kitty and so must invest only in the dullest and lowest-return investments possible because their perceived risk is the lowest. In other words, the only feasible options for them are fixed deposits, post office deposits, various government schemes like Public Provident Fund (PPF), Senior Citizens Savings Scheme (SCSS), and similar options.

However, there's a big problem in using this approach to saving in general, and especially to saving for retirement. The idea that investing or saving exclusively through this mechanism is not only wrong, but is actually dangerous. By doing this, you might very well spend your old age in poverty. This is not an exaggeration.

The problem is inflation, which will eat into your savings if fixed-income returns are all that you are getting. The biggest challenge is to have an income that adjusts upwards with inflation. Those who earn from rent or such sources may be lucky on this count, but for everyone else, being hard-up in old age is a real threat. Interest income from PPF, FDs and the like has low real returns and a retiree who depends on these will end up depleting his or her capital.

However, equity returns are on a different scale and if retirees want to spend their twilight years prosperously, then equity is their only hope. And to the question of equity being risky, yes, equity is risky, but only over short periods of time. Over long periods of time, equity grows while the real (inflation-adjusted) value of fixed-income investments like deposits and bonds declines.

Read more on investing in equity to meet retirement goals here.

Recommended Stories

Other Categories