The uncertainty and speculation surrounding COVID-19 have impacted financial management, amongst many other things. Stock markets continue to remain volatile and unpredictable, and bank interest rates are on a steady decline. These are among the two major asset classes popular with Indian investors, and invariably form a major chunk of every retirement portfolio.
Investors need to take a proactive approach so that their financial plans and aspirations are not jeopardized due to the uncertainties brought on by the pandemic. Here are a few strategies to consider, to deal with COVID-19’s impact on your retirement plans.
This is not the first financial crisis, and surely won’t be the last one. Even though the situation might seem scary, avoid making irrational decisions that can have an adverse impact on your long-term portfolio. Liquidating fundamentally sound investments, discontinuing SIPs or dipping into your retirement pool to pay for unexpected expenses can set back your retirement goals by years.
Remember, any meaningful wealth creation takes time. You need to stay patient and stay the course by investing regularly.
Remember the basics
Achieving retirement goals without covering the fundamentals of financial planning could be attributed to luck more than financial prudence. It’s a simple seven point plan:
-Budget expenses: Keep track of your expenses
-Increase savings: Prune unnecessary and impulsive spending
-Increase investments every year with any increase in income
-Get health insurance for yourself as well as dependents
-Create an emergency fund worth 6-12 months’ expenses
-Minimise unnecessary debt: Avoid taking debt for discretionary expenses
-Get a term life insurance of 6-10 times your yearly income
Attempts to make course corrections regarding your retirement plan are futile unless you address these basic financial planning issues.
Prioritise your goals
Depending on how close or far you are from your retirement, you may have to prioritise your goals and work on an action plan based on what milestones you want to achieve by the time you’re closer to this financial goal. Someone who is in the early stage of their career can pivot relatively easily and increase savings once things tide back to normal.
However, it’s a different scenario for those nearing their retirement age. In case they’ve not been able to save and invest for their retirement corpus as planned, they may have to take some hard decisions or even scale back on their expectations.
Revisit your investments
Take time to analyse each investment and look for ways to protect your savings while seeking opportunities to redeploy in favourable investments. Engage an expert to figure out your asset allocation and evaluate the quality of your investment choices.
For example, some portion of fixed income investments can be reallocated to debt funds that can deliver better returns than conventional options such as bank deposits.
Invest systematically via SIPs (Systematic Investment Plans) or STPs (Systematic Transfer Plans). This would let you gain from Rupee cost averaging by making additional purchases in equity-based investments.
Build a financial cushion
If the pandemic has thrown your household income in disarray, you may want to consider monetising any skills or expertise to add new revenue channels. Loss of income will have a direct impact on your retirement planning; hence, even a modest stream of supplementary cash flow can help you mitigate the financial impact brought on by the pandemic.
It is recommended that you create an emergency fund that can cover your expenses for a 6-12 month window. Ensure you consider all your regular expenses including EMIs, education related and health care expenses.
Interest rates have not just dipped on bank deposits, but on loan products too. If you have a business loan, car loan or mortgage with a floating interest rate scheme, this is a good time to renegotiate your interest rates. Connect with your bank and aim to reduce the outflow on your monthly EMIs. The proportionate savings can be redirected towards your retirement portfolio.
Diversify your portfolio
Diversification is one of the fundamental pillars of long-term investing so as to optimise returns, and reduce portfolio risk and volatility. Conventional debt and equity investments should continue to dominate your portfolio. They provide adequate diversification for most of us. Many of us own gold and real estate and it is ok to use them for diversification in your investment portfolio. Do not shy away from generating liquidity from gold/real estate in case you need it. Appropriate asset allocation is required. Take the help of an expert to ensure that your portfolio is aligned to your circumstances.
Consult a wealth manager, lay down all your fears and aspirations, and work with them to take the best course of action to the pot of gold at the end of the rainbow.