How will the evolving trend in declining interest rates impact retirement planning ?

Successfully planning your retirement is becoming increasingly complex: particularly when you're trying to do it without expert help: there's just too much advice online, everyone has their own opinion on the best way to plan, and they often contradict one another!

There are, however, some basics that must be looked into whenever we plan long-term. With advances in medical science, better nutrition, and access to quality medical care, most of us are going to live longer than anticipated, so our retirement plans need to keep pace. There are three key questions you must ask yourself:

·         Are my investments staying ahead of inflation?

·         Will the corpus be enough to support my current lifestyle at future costs of living?

·         What is the larger trend in interest rates and performance of various asset-classes ?

That last question is one that many of us miss, and it makes a huge difference. Think about it: we never put all our eggs in one basket when investing, for obvious reasons. We try to diversify, to the best of our knowledge: we invest across various industries and asset classes, we invest in mutual funds, real estate, PPF, post office deposits and other investments. Some of our investments are growth-focused investments with a higher risk profile, while others are considered safe like fixed deposits and other instruments with a fixed rate of return.

However, if the rate of interest drops over time, and if a big chunk of your contributions towards building retirement corpus is from fixed income products, then a falling interest rate would translate into a lower retirement corpus at the time of retirement as well as lower annuity income post retirement. If you happen to fall in the higher tax brackets, i.e. 20% or 30%, then fixed income investments are likely to provide negative real returns on a post-tax basis (i.e. post-tax returns, which are lower than inflation).

On the other hand, mark-to-market debt products, such as debt mutual funds or gilt mutual funds or exposure to similar asset-class through the asset-class C (Corporate debt) of NPS (National Pension System) or the asset or the asset-class G (Government debt) of NPS, promise returns that beat inflation. On this count NPS C and NPS G, have easily

outperformed their Top quartile counterparts in mutual funds as well as fixed return investments (such as Bank FD, AAA rated Corporate FD or even PPF) on a post-tax basis, and this outperformance is enhanced as the investment time-horizon increases. One of the reasons for this outperformance has been the fact that NPS C or NPS G, provide returns from accrued interest of their portfolio’s underlying investments as well as capital gains or appreciation in the NAV of their portfolio.

Considering the most growth-oriented asset-class, Equity, NPS Equity has outperformed it’s counterpart in Top quartile large cap mutual funds, on a post-tax and post-expenses basis.

Accordingly, Your investment strategy needs to address this trend in interest rates decline & empirical & expected performance of various asset-classes: you could still invest in FDs and fixed income products, but it would be prudent to reduce your % allocation to such investments.

In India, by and large, interest rates are falling. If you invested in an SBI Fixed Deposit for 5 years in 1996, you would've earned a whopping 16.50% per annum. The same investment in 2006 would've earned you just 10.25% and in 2016, it would've earned you just 6.25%. As of 2021, the SBI FD rate on 3-5 year FDs was down to 5.4%. Think about how that would affect you if your retirement strategy relied heavily on FDs.

There have been a few upticks too: 2008 and 2009 saw interest rates as high as 12.25% and 2013 saw it jump up to 9%. These upticks though are few and far between. When we look at the larger picture, these rates have fallen. It is expected that the rate of interest will continue this downward trend in the future, and that's what you need to plan for.

How can you counteract this effect, without significantly raising your risk profile? The Stock Holding Corporation recommends adding the National Pension Scheme to your investment portfolio. Incorporated in 1986 as a Public Limited Company, the Stock Holding Corporation has catered to millions of customers, through a growing nationwide network of over 200+ branches. It has also advised financial and retirement planning for Government employees. Stockholding Corporation, like all savvy investors, believes that a well-diversified portfolio which matches your changing risk appetite as you get older is key to a successful retirement strategy.

The National Pension Scheme (NPS) is a government-sponsored pension scheme which allows you to contribute regularly to a pension account during your working life. On retirement, you can withdraw 60% of the corpus and use the remaining 40% of the corpus to buy an annuity to secure a regular income after retirement.

NPS not only gives you the option of multiple asset classes, it also lets you decide what proportion of investments are to be allocated towards each asset class (equities or debt). Since every asset class has a different risk-return profile, this flexibility allows you to customize your NPS asset allocation and have it in sync with your risk profile.

NPS also offers you two options to choose the asset allocation for your NPS portfolio – Active Choice and Auto Choice. The Active Choice option of NPS offers you the highest flexibility in selecting the proportion of asset classes in your portfolio, to balance risk. This is meant for more experienced/confident investors. The Auto Choice option works on the principle that as you grow older and get closer to retirement, your focus should be on wealth preservation by minimizing the overall portfolio risk. When you start out, the allocation leans towards high return instruments, but as you get older, the allocation shifts towards less risky instruments.

Stock Holding Corporation makes it very easy for investors of all stripes to invest in NPS. Through their website, it is easy to open an NPS account online - all the forms are available for download, they've simplified the process, and backed it up with lightning-fast processing. Once set up, you can open and pay contributions online with no hassles and no complications. However, should you need to have an in-person experience, you can, with their large network of branches. Irrespective of whether you need help online or in person, Stockholding Corporation has a huge pool of trained experts ready to assist you.

StockHolding offers online NPS Advisory services at ttps://pensionadvise.stockholding.com. These assist a subscriber to : (i) minimize Income Tax, (ii) use active asset allocation which outperforms LC25/50/75, (iii) use Pension Fund Manager recommendation in keeping with the active asset allocation, (iv) estimate expected pension upon retiring.

Those desirous of availing offline NPS Advisory services, can drop an email to iasd@stockholding.com, mentioning their name and contact number.

The one piece of advice everyone agrees with on retirement planning is that you need to start today. No matter how young you are, you'll never thank yourself for starting your retirement planning late, because the power of returns compounding over the long run, makes a huge difference to the Corpus accumulated eventually.

Visit Stockholding.com to begin retirement planning, diversify your portfolio, and bring greater ease to your investments.