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May 22, 2013, 02.50 PM IST | Source: Moneycontrol.com

Not-so-good investment options for retirement planning

There are several important reasons why one should take significantly less investment risk during retirement than before retirement.

Retirement means the end of active earning; it is also a time to enjoy the fruits of a lifetime of hard work.  A proper plan for savings and investments coupled with prudent measures like insurance can go a long way towards a happy retirement

There are several important reasons why one should take significantly less investment risk during retirement than before retirement. People need to stretch their retirement wealth as far as possible and should invest most of their funds conservatively. Investing aggressively would offer them the likelihood of financial windfall but it also raises the prospects of inferior results or outright losses. This is generally not a good trade-off for retirees on tight budgets.

Ideally a person should not invest the following instruments to avoid taking on higher risk:

Stocks: Known for its High Risk-High Rewards potential, but it can go the other way around also with the high risk of losing one’s capital. A person in his retirement should preferably avoid investing in stocks since stock markets are prone to volatility and there are high upwards and downward movement in the market. It could also lead to erosion of ones savings. 2008 was an unpleasant reminder to stock investors that companies and markets that were thought to be only "somewhat risky" can indeed be extremely risky. But if one is about dabbling in stocks, then the investments should only be in high quality stocks that can be held for the long term and which tend to provide dividend in a consistent manner.

There are some types of stocks which should be avoided at all costs, viz.:

  • Highly leveraged companies that are prone to liquidation in times of recession
  • Penny Stocks & Small-cap stocks: These stocks with proper analysis tends to provide maximum returns, but at the same time are the riskiest of stocks. Investments in these stocks could backfire at times like a recession or due to unfavorable market news. It’s best to avoid such stocks.
  • Derivatives trading: Such trading activities linked to equity and commodities, should be avoided as these are highly volatile and needs day to day (sometimes minute to minute) monitoring. Trading in derivatives could make retirement difficult as it can erode away the capital when things don’t go according to plan.
Equity mutual funds : Funds which invest purely in equities should be avoided as these again are linked to markets and do not provide fixed incomes. However a small amount of investment could be made using the SIP route (so as to avoid timing the market) as it holds the potential to boost returns from the portfolio.

Real Estate: Even investing in real estate could be risky at times, due to reasons like political tension  or natural disturbances, wrong selection of location, dropping real estate prices due to market conditions and so on. It is very important to understand the concept of opportunity cost while investing in real estate. Real Estate in the long tenure has the potential to provide exceptional returns but by blocking such funds a person also does not get to enjoy such funds today and that is not ideal for a retiree.

Corporate fixed deposits: These should also be avoided as these are usually issued when the company is in dire need of funds and such there is always the risk of liquidation and no certainty of fixed returns. It is always better to invest in fixed deposits issued by banks, as there is huge security backing such deposits and the risk of default is negligible.
 
The best investments during the retirement phase are the ones which provide fixed returns and are safe from recession and market volatility, such as bank fixed deposits, savings account, pension, debt mutual funds, government securities, etc.

Summary:

  • Risk is everywhere. Certain investments may seem safe and stable for years on end, then suddenly blow up in an instant. So always keep in mind "Higher risk does not always guarantee higher returns".
  • If one has cash to spare after setting aside for a comfortable post-retirement life, then it may be worth considering riskier investments. Those whose resources are limited should always prepare a plan / budget and accordingly invest and should keep enough for retirement, as one cannot go back and start over.

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