Saving for retirement has a very long-term investment horizon and equity-based assets are an excellent choice.
As a long-term savings project, accumulating savings for retirement is no different from any other long-term savings. 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 not invest them in equity.
As a long-term savings project, accumulating savings for retirement is no different from any other long-term savings. 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 not invest them in equity.
The logic is that older people are not earning any more so they can't afford to take any risks. 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 also to investments that even younger savers make for 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 are fixed deposits, post office depositss, various governmment schemes like Public Provident Fund (PPF) Senior Citizens Savings Scheme and similar options. However, there's a big problem in using this approach to savings.
The view about the safety of this approach is not only wrong but is actually dangerous. If you follow it carefully, you are likely to spend your old age in poverty. This is not an exaggeration. Actually, the advice given to retirees about sticking to fixed income deposits as the only safe option is way beyond wrong. This advice is so utterly misguided and any senior citizen following it will head for a financial disaster if he lives a little long.
Obviously, the problem is inflation, which will eat into your savings if fixed-income returns are all that you are getting. In India, this threat is huge and is getting worse by the year. The government mouths platitudes about getting prices under control but in reality it has almost given up on it. Currently, consumer price inflation is close to 11 per cent higher than any deposit will earn you.
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 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. The lesson is clear, if retirees want to spend their twilight years prosperously, then equity is their only hope.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.