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Over the years, a common trend has been noticed among clients building their retirement portfolios. They have heard about the fantastic returns on equities and mutual funds that can be delivered, and the readiness to invest is shown. A plan is charted out collaboratively and everything seems to be on track. However, a few years later, visits to the office are made—not for growth discussions but for fund withdrawals. Statements like, “It’s for my child’s education,” or “Wedding expenses need to be covered,” are often heard. And in this way, carefully constructed retirement plans start to unravel.
This risk is referred to as continuity risk—the risk that long-term investments will fail to remain long-term due to unforeseen life events. In Indian households, this issue is more prevalent than it may initially appear.
Continuity risk is the possibility that your long-term investment goals will be disrupted due to premature withdrawals. It’s not always about emergencies; sometimes it’s about cultural priorities—funding a child’s education, paying for a wedding, or helping out family members. While these are valid and important goals, they often come at the expense of your retirement savings.
Social media content, shared by influencers and financial advisors, compares high returns from equities and mutual funds to those of traditional investments like fixed deposits or annuity plans. Temptation to invest is encouraged, and investment for securing the future is rightly highlighted. However, the discussion of continuity risk is often absent in these narratives.
In India, family obligations are given more importance over personal financial security. A study conducted by HSBC revealed that 41% of Indian parents prioritize funding their child’s education over contributing to their own retirement savings. Additionally, 65% admitted that paying for their child’s education made maintaining other financial commitments more challenging.
This tendency to prioritize immediate family needs over long-term financial security leads to continuity risk for many Indian investors. The liquidity offered by mutual funds and equities further exacerbates this issue.
The liquidity provided by investments in equities and mutual funds allows withdrawals to be made with relative ease. While this feature is beneficial, it introduces a significant risk. Premature withdrawals are often tempted by this ease of access, disrupting the compounding growth essential for retirement security.
Data reveals concerning trends:
Approximately 50% of mutual fund investments are redeemed within a year.
Only about 3% are held for more than five years.
The average holding period for mutual fund schemes in India is approximately 2.5 years.
This demonstrates that although investments are initiated with good intentions, liquidity often results in short-term thinking, adversely affecting long-term growth and compounding benefits.
Financial discipline and security during retirement are ensured by a balanced portfolio where risk is mitigated and returns are guaranteed. Premature withdrawals are prevented by the structure of these products and combinations, protecting the retirement corpus and guaranteeing steady income during the golden years. At times, lack of liquidity serves as a safeguard against impulsive withdrawals, ensuring the intended purpose of the funds is served.
To address continuity risk, several strategies can be employed:
Create separate, goal-specific investment accounts to address predictable life events like children’s education, weddings, or other major expenses. These accounts can be tailored to match the timelines and risk tolerances of each goal. By segregating these funds from retirement savings, you not only preserve the integrity of your retirement corpus but also avoid the emotional and financial strain of dipping into future resources for immediate needs.
Allocate a portion of the portfolio to guaranteed return plans, such as annuities or other structured investment products. These plans provide a reliable and predictable income stream during retirement, ensuring financial stability. By offering a disciplined payout structure, they help retirees avoid the temptation of premature or excessive withdrawals, thereby preserving the longevity of the retirement corpus.
Undertaking a holistic approach to financial planning ensures that retirement goals are aligned with other financial priorities. Collaborating with a financial advisor can help in creating a tailored plan, covering aspects like emergency funds, healthcare expenses, and long-term investment growth. Furthermore, educating family members about the significance of preserving retirement savings fosters a shared commitment to financial discipline. This education can include basic financial literacy, discussions about the consequences of premature withdrawals, and guidance on prudent spending.
While equities and mutual funds contribute significantly to wealth accumulation, the risk posed by continuity disruptions must be acknowledged and addressed. Retirement planning must focus on both growing and protecting wealth for the envisioned life. It must be remembered that secure retirement depends not only on wealth accumulation but also on protection against unforeseen withdrawals.
As a financial planner, my advice is simple: stay disciplined, plan for every goal, and let your retirement corpus work for you, not the other way around.