Illustration by Binay Sinha
With life expectancy going up due to the availability of better healthcare, most people can easily expect to live for another quarter century or more after retirement. Hence, it is important that they invest their retirement corpus with due care. Not only should it last throughout their lifetime, but it should also help them deal with inflation so that they do not have to compromise on their lifestyle due to lack of funds.
When people retire, the nature of expenses they incur changes. “Conveyance expenses and lifestyle-related expenses are likely to go down. Most loans would hopefully have been paid off, so the burden of repaying them is usually not there. However, medical expenses can go up,” says Suresh Sadagopan, founder, Ladder7 Investment Advisories. Financial planners say that post-retirement, household expenses are about 80 per cent of what one spent during working years.
Where should you invest? The retirement corpus should be divided into two parts: One portion should generate a regular income, while the other should be invested in growth-oriented instruments that will help the corpus grow and be able to combat inflation. “Senior Citizen Savings Scheme, Pradhan Mantri Vaya Vandana Yojana, bank fixed deposits, and National Savings Certificate are some of the safest instruments for generating a regular income for senior citizens,” says Sadagopan. Growth options can include equity saving schemes, balanced funds, and large-cap funds.
The first thing Yadav should do is create a contingency corpus for large expenses, such as medical emergencies, that can arise suddenly. He should put Rs500,000 in an ultra-short-term mutual fund.
Since Yadav’s wife will work for the next five years, the income generated by her will suffice to meet their monthly household expenses. As Yadav will not need his retirement corpus for the next five years, he may invest the balance amount of Rs2 million in equity savings schemes of mutual funds, which have an equity exposure of 20-40 per cent, with a time horizon of five years.
But imagine a situation where, soon after Yadav’s retirement, Sunita too decides to quit her job due to say, health-related reasons. In that case, after creating a contingency fund, Yadav should invest Rs1.5 million from his corpus in Senior Citizen Savings Scheme, which will generate a regular income for him. This five-year scheme will give him an assured return of 8.30 per cent per annum with quarterly interest payout. It will generate Rs10,000 per month that will help him meet his day-to-day expenses. The balance Rs500,000 should be invested in equity savings funds with five years’ horizon. This part of the corpus will keep growing and help Yadav deal with inflation. Ideally, around 35-40 per cent of a retiree’s corpus should be invested in growth assets.
Yadav started saving for retirement late, so his funds may not suffice to meet all his expenses. They will have to be supplemented by his wife’s savings. Another option before Yadav is to take up tuitions or other part-time jobs to supplement his monthly expenses. He may also need to curtail his day-to-day expenses. “If property is a large portion of Yadav’s wealth, he should bring down exposure to it. This will unlock the money from this rather illiquid asset and enable him to meet the shortfall in his corpus,” adds Sadagopan. Rahul Jain, head, Edelweiss Personal Wealth Advisory suggests that retired individuals who are not able to manage the lifestyle expenses associated with a big city may consider shifting to a smaller city which can accommodate their retired life more comfortably.
If you have a corpus of Rs10 million: Shisir Kumar Pandey, 61, worked as an accountant in a business firm. He retired a month ago with a corpus of Rs10 million. His wife, 54, Kiran is a freelancer. Kiran’s income can take care of their day-to-day household needs. After keeping aside around 5 per cent in a contingency fund, Pandey should invest the rest of his corpus in balanced or large-cap equity funds for the next five-seven years. He should make no withdrawals from this corpus and allow it to grow while Kiran is working.
Once Kiran also retires, Pandey should assess how much he will need each month. Rental income from a house or two should be used to meet household expenses. He should then invest a part of his corpus, including Kiran’s, in SCSS, PMVVY and Systematic withdrawal plans (SWP) of debt funds to generate a steady monthly income (see table). The balance portion should be invested in corporate deposits (cumulative option), and in index, hybrid and large-cap mutual funds so that the corpus keeps growing and provides a cushion against inflation.