Gain maximum from your retirement corpus
Sridhar Arunachalam, who is on the verge of retirement, is working in a public sector undertaking and will get a retirement corpus of around ₹60 lakh soon. The issueless couple is clueless at present on investment options, but wants their principal amount to be protected. Arunachalam says, “My colleagues have been telling me to go for fixed deposit since I will be getting assured returns and it will protect my principal amount too. But given some other option, I would also like to take medium-term risk by investing in equities.”
Like Arunachalam, there are many senior citizens, who struggle with a huge sum of money, and invest either in fixed deposits or real estate. Jayanthi Subramanian, who has retired recently, says, she had a tough time in deciding investment options. “Many of my relatives were advising me to purchase a flat as it will give me steady income in the form of rent. It was a tough choice and even if I want to try other investment options, people were advising me against it, considering the risk involved,” she says.
There is no one shirt fit for all. It all depends on individuals and other factors, such as the size of the corpus, cashflows required and risk appetite, says financial expert C Sathish Kumar.
“Based on the above factors, in the current scenario, one can look at Senior Citizen Savings Scheme (SCSS) with quarterly interest payouts @ 7.4% p.a., Short term bank FDs, Pradhan Mantri Vaya Vandana Yojana with LIC of India for such retirees who are conservative,” says C Sathish Kumar, CEO, Tradewise India.
He adds that SCSS, Pradhan Mantri Vaya Vandana Yojana with LIC, Bank FDs of not more than ₹5 lakhs in a single deposit in a single bank are the best options for a low-risk appetite people.
For retirees who aren’t ultra conservative, having a small part of the corpus deployed to generate inflation-beating returns can also be considered.
“This can be achieved by investing a bulk of the corpus in safe debt instruments, while a small percentage of the corpus can be deployed in growth oriented equity funds. It must be noted that the amount invested in equity should be only that much which the retiree is sure to not require for at least 5 or more years,” says investment advisor and founder of StableInvestor Dev Ashish.
He adds that for retirees who are moderately aggressive, then having a small equity component in their portfolio helps.
Preserve the capital
Financial experts say that one has to set aside 10-15 years worth of expenses to ensure that the short-to- medium-term income requirements aren’t exposed to any risks like potential loss of capital if invested in equity. For instance, if Mr. Sridhar’s monthly expense is ₹50,000, it comes to ₹6 lakh per annum. Then an amount equal to 10-15 times annual expense, around ₹60-90 lakhs, can be parked in income-generating debt instruments while the remaining can be parked in equity funds, suggests Ashish.
Often, people tend to forget inflation. It can be a retirement killer and affects their purchasing power. If a retired person thinks ₹50,000 monthly expenses will be the same even after 10 years, then he/she is miscalculating. The inflation rate of around 7% a year can be calculated to be on the safe side.
Balancing the real return with a mix of equity for long-term
Having about 10-25% of the retirement corpus in equity provides a safe-enough balance of steady and safe income-generating debt instruments and inflation-beating equity-oriented growth component.
Ashish says, “Once the debt portion starts getting depleted over the course of several years, the equity can be slowly transferred to the income generating debt options after 10-15 years to act as a top up for the depleting debt portfolio.”
For those who are willing to go up on the risk, one can add upon Dynamic asset allocation products such as Balanced Advantage Funds or Dynamic Equity Funds wherein such funds tend to give returns little better than the FD rates with tax arbitrages over investments horizon of more than 3 years. Finally for the ones with aggressive risk, one can look up to Balanced funds or Hybrid equity funds, says Sathish Kumar.
Dividend or Growth option?
Many people make financial mistakes that are hard to be rectified as by the time they realize it will be too late. “The most common mistake I find with individuals are, understanding the basic financial concepts such as cash flow requirements, the difference between Dividend and Growth options, and thereon the tax implications in the current scenario of taxation. I find many investors go on to receive cash flows even if they do not require it. Also, many others think that the Dividend option is better than the Growth option since the underlying quantity of units does not change,” says Sathish Kumar.
Also many senior citizens tend to invest in real estate, either for themselves or to support son or daughter’s investments. Some buy houses to generate rent to supplement one’s income from other debt instruments. But financial planner Dev says this might not always be a wise idea as it’s possible that the retiree may be unable to keep the property on rent at all times.
“If that happens, then how will the retiree take care of his income needs? But if a sufficient amount is already invested in income-generating debt instruments and additional surplus is leftover, then it can still be considered as a possibility. Another factor to consider is that being a physical asset, real estate demands regular maintenance and running around. And that is something that many old retirees may not be very comfortable doing. So investing a part of your retirement money in real estate should be done with extreme caution and a lot of deliberation,” Ashish suggests.
Though equities have the potential to offer good returns, retirees should consult a proper planner so that he/she will help retirees allocate the amount according to one’s needs. Instead of planning in the last minute, one can start at least a few years prior to retirement. Also, only experts can give their opinion/suggestion and retirees should not listen to colleagues and their relatives as any wrong move will make retirees suffer in the sunset years.
1) Retirees can split the corpus – short, medium and long term. In the initial five years, it is better to invest in liquid funds, as it is for immediate use and the next 10 years can be in income and growth oriented debt schemes and the next 10-15 years can be in equity so that it will take care of inflation.
2) If you are conservative, then you can go for Senior Citizen Savings Scheme (SCSS) with quarterly interest payouts, Fixed Deposits, high quality debt mutual funds and RBI Floating Rate Bonds.
3) A small percentage of the corpus can be deployed in growth oriented equity funds.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.
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