Retirement funding is an important goal for everyone. But it is nowhere on the radar for most people till they are into their forties. It is then that realisation dawns and they start putting away some money for retirement.
Of all the goals one has, retirement is the least glamorous. Buying a home, children's education and marriage, buying a vehicle, vacations, have a positive, feel-good aspect to them. Retirement, on the contrary, denotes ceasing work, which for some people means loss of prestige and descent into irrelevance. No wonder, it does not get much attention.
For most goals, one can take a loan and get by - except retirement.
For those in salaried jobs, a significant portion of the retirement fund comes from retiral benefits. But again, the retirement fund is greatly depleted in many cases, as provident fund amount is withdrawn for various goals during the working life. Hence, the fund corpus can be vastly different for different people. Most people have other investments too.
However, the quantum of the corpus is not really the problem. A lot depends on expenses and goals as well as commitments during retirement years.
We need to assess whether assets they have are enough to take care of their requirements during their lifetime. This can vary a lot. Hence, the way regular income is set up, as well as investing the balance funds, need to be tailored keeping individual requirements in mind.
It is important to set up regular income during retirement. Some people have pension, rental income, etc. The additional regular income needed in such a case may be modest. There are others who may not have such income sources and for whom regular income needs to be ensured from scratch.
While investing to earn regular income during retirement, expenses must be assessed carefully. Normally, expenses come down after retirement due to lesser spending on commute and work-related incidentals as well as lifestyle expenses. Again, expenses stabilise a year or so into retirement.
Hence, it is good to set up income that meets 60-75 per cent of the needs, at the start. The balance can be met from a pool kept for funding the shortfall, month on month. After a year or so, if there is still a need to set up additional income, it can be done then.
Setting up an Income Stream
There are multiple options to earn income during the retirement phase. It is important to invest in low-risk vehicles. Preservation of capital is a very important objective in retirement and we need to be mindful of that.
Senior Citizens Savings Scheme & Pradhan Mantri Vaya Vandana Yojana are two government schemes which offer 7.4 per cent per annum. One can invest Rs 15 lakh in each of them (and an equivalent amount for the spouse). One may also consider Post Office Monthly Income Scheme for regular income.
Apart from this, there are non-convertible debentures (NCDs) and bonds that can be sourced from the secondary market. These offer better rates than bank fixed deposits. For instance, Bank of Baroda bonds are available at 8 per cent-plus yield. It is a good yield for an AA+ rated instrument today. There are also other options that one may consider while setting up an income stream.
Then there are debt mutual fund schemes. Income can be ensured through systematic withdrawal. For those who come in higher tax brackets, a systematic withdrawal from a debt scheme can reduce the tax rate to less than 10 per cent. So, there are a whole range of products available to invest.
The entire corpus cannot be used for ensuring regular income. It needs to be deployed diligently to take care of various other requirements as well.
We need to build a liquidity and emergency corpus. Money also needs to be available for various goals that may come up after retirement. One may also want to pursue one's passion like travelling. Due to inflation, a higher income will be needed in future to maintain the same living standard. Philanthropy and passing on a legacy are also on the minds of many.
Where will the rest be invested?
Apart from the money invested for income generation, the rest of the money needs to be invested as per the risk profile of the person. It is a fallacy to think that a retired person need not invest in equity assets. A small portion of the corpus needs to be invested here too so that this portion can generate returns well over inflation and make one's corpus last longer.
A Case Study
S.K. Sharma has just retired from a middle-level position in a corporate entity and is looking forward to a comfortable retirement. He received about Rs 85 lakh as final settlement, which includes his EPF, gratuity and other retiral benefits. He has an existing investment of Rs 20 lakh in FDs which are yielding about 7 per cent. He has about Rs 22 lakh in equity mutual funds as well. He has invested Rs 18 lakh in FDs for marriage of his daughter Vidyalakshmi which is expected any time now.
He has his own home and medical insurance for him and his wife to the tune of about Rs 10 lakh. His daughter works in a private firm. She manages her finances and has her own medical insurance.
He is spending about Rs 45,000 per month and another Rs 2 lakh on an annual basis towards vacation, insurance premiums and incidentals. His wife Aditi has a small source of income through tuitions which is expected to continue for several years. She has her own investment of about Rs 12 lakh by way of FDs which she would continue to hold.
Sharma is a conservative investor. Hence, both Senior Citizen Savings Scheme as well as Pradhan Mantri Vaya Vandana Yojana would suit him. These together would offer about Rs 18,000+ per month.
FDs can be retained as they are yielding an average of about 7.5 per cent and interest comes in quarterly. Another Rs 20 lakh may be invested in a corporate bond fund and systematic withdrawal of Rs 10,000 per month set up. These together will yield Rs 42, 000 per month, which is near about what he needs.
What is also recommended is an investment of about Rs 20 lakh in some NCDs & bonds which have an AAA or AA+ rating that can offer a return in excess of 7.5 per cent. These normally offer an annual return. This will yield Rs 1.5 lakh, which can be used for annual expenses.
Rs 15 lakh should be kept aside in ultra-short term funds, liquid funds and arbitrage funds for liquidity, contingencies and meeting shortfalls. His equity mutual fund portfolio needs to be reviewed for investing in appropriate equity-oriented funds. That rounds up his retirement portfolio deployment.
At retirement, one's lifetime wealth is involved. It needs to be deployed properly for the next important phase of life, spanning decades. There is no margin for error here and, hence, seeking professional help may be of immense value.
The writer is Founder, Ladder7 Financial Advisories
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