Financial strategy is not only necessary for companies, but individuals too. This is because financial risk extends to individuals as well. As in the case of corporate financial strategy, it is important to identify the risks and find solutions in personal finance.
When it comes to retirement planning, it is crucial to take measured risks. You can’t invest all your money in the stock market and call it ‘retirement fund’ for the simple reasons of ‘market risk’ and ‘high volatility’. You don’t want to risk all your retirement money and leave it to the mercy of market fluctuations. Can you make up for such negligence in retirement? Are you ready to work longer?
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Start with identifying the risks unique to you. Risks can visible or invisible. Risks can be immediate or gradual. Risks can be simple or complex. Whatever the nature of risk, it requires attention.
Start planning for retirement early. This will allow you to take things easy. Patience and perseverance is the secret to achieving milestones. You need to be logical, reasonable and rational. If you want equity exposure but are a new investor, it is foolishness to invest in equity directly. Instead, consider investing in equity mutual funds. You can never get optimal solutions to mitigate financial risks. You have to settle for the most advantageous solutions.
Longevity risk is the risk of living longer than an average individual does. When you live longer than expected, you tend to exhaust all your savings, early. Say that X and Y are a couple, both aged 30. On calculating, they find out that their average life expectancy is 80 and 85 years respectively.
However, they can’t totally go with the calculations and stick to them. There has to be room for longevity and provisions must be made accordingly.
A life annuity is one of the best retirement plans that can mitigate longevity risk. Annuity plans have various types of payouts options like life annuity, joint life annuity, life annuity with return of purchase price, and so on. You can opt for any of the annuity payouts depending on your financial needs post-retirement and the quantum of risk that you are exposed to. Most annuities pay for your whole life post-retirement. This way, even if you live longer than expected, your expenses are covered by annuity payouts.
However, life annuities in India are not inflation-friendly. Also, annuities are taxable. If you fall in a high tax bracket, you’ll have to give up a huge chunk of your retirement income to tax.
You can combat this by availing two annuities and adjusting their income phase at two different points in time. In our example, X may choose to receive Annuity A at the age of 60 and Annuity B at 70. This spreads money across retirement.
With increasing age, the risk of disability and critical illness rises too. A term insurance policy protects you against mortality risk. How about disability and critical illness risks? Disability and critical illness can end a family’s or the breadwinner’s income. You definitely need to be protected from this risk.
There are various types of health insurance policies designed specifically to cover such risks. Alternatively, you can avail disability and critical illness riders on a basic health insurance or life insurance.
The problem is that disability and critical illness insurance products offer low sum assured and have certain terms and conditions which impact the effectiveness of such products.
It is always wise to start saving as much as you can, as early as possible. This will surely help in diluting the risks. Also, monitoring your health and taking precautions in day-to-day life helps a lot.
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Every rational person considers inflation while strategizing investments. However, it is necessary to combat the risk of an unexpected rise in inflation. Inflation makes a huge dent in savings. An unexpected rise in inflation can cause irreversible damage to your retirement portfolio. It will reduce the real value of your long-term bonds.
One way to mitigate this risk is by subscribing to CPI inflation-protected government bonds. Though these are not tax efficient, the damage can be reduced. Equities and real estate are another way of mitigating inflationary risks.
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