I will get around Rs 40 lakh when I retire this year. I and my wife do not have any liabilities and we live in our own house. Please suggest an investment strategy that can give me a fixed monthly income for living expenses.
— SB Singh
Monthly cashflow | ||
| Option | Returns | Income/Month |
| Sr Citizen’s Fund | 9% | 8,250 * |
| Post Office MIS | 8% | 4,000 |
| Bank fixed deposit | 8% | 2,000 |
| Liquid fund | 750 | |
| Total | 15,000 | |
| * Paid every six months; income in Rs | ||
If you do not have any liabilities and live in your own house, a Rs 40 lakh retirement corpus should be sufficient to give you a modest monthly income. If your investments will be your only source of income, your key concern should be preservation of capital.
One thing to keep in mind while investing in a retirement corpus is how much (if at all) of the principal amount you should be drawing. This determines the rate of returns your investments must yield to protect you against inflation and keep your corpus from dipping. Since you do not want to take on much risk, pure equity investments won’t suit you. We suggest you invest in a mix of debt options and mutual funds.
While the debt investments will generate income, you still need some equity exposure to beat inflation. Invest in an MIP which allocates a small portion to equities. A suggested allocation is given in the table. Let us assume that you need Rs 15,000 a month for your living expenses today.
The Post Office MIS and the bank FD will give you Rs 6,000 every month. The Senior Citizen’s Scheme will earn an interest of Rs 8,250 every month but this will be paid every six months. Till the first tranche is paid after six months, you can dip into the liquid fund for daily expenses. You can also withdraw from the liquid fund to meet any shortfall.
Suggested investments | ||
| Option | Amount (Rs) | Investment rationale |
| Sr Citizen’s Scheme | 11,00,000 | This highly safe scheme with 9% assured returns should be your first choice. Income is taxable. |
| Post Office MIS | 6,00,000 | Senior Citizen’s Scheme pays 6-monthly interest, so cash flow is lumpy. Use this for monthly income |
| HDFC MIP Short Term | 10,00,000 | With 10% equity exposure it helps beat inflation. Go for growth option and don’t sell for 5-6 years. |
| Templeton Liquid Fund | 10,00,000 | Use it as a feeder fund and transfer Rs 7,500 a month into an equity fund. Opt for growth option. |
| Bank FD | 3,00,000 | Keep this sweep-in bank account for emergencies |
| Total | 40,00,000 | |
Your household expenses will rise every year. If you assume an annual inflation rate of 6%, they would exceed Rs 20,000 a month in five years time. Therefore the withdrawals from the liquid fund will have to increase every year.
The withdrawals and transfer of Rs 7,500 into the equity fund would deplete the liquid fund to about Rs 4 lakh in five years. That’s when your HDFC MIP will fill the gap between your needs and earning. Start withdrawals from the MIP after five years.
Assuming a return of 8%, the investment would have grown to about Rs 14.5 lakh. By that time, you would be a senior citizen for taxation purposes with a lower tax liability. Lastly, we suggest you take medical insurance for your wife and yourself if your employer does not give you life long cover. It would help you tide over any medical emergency.
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