I am 59 and plan to stop working at 62 and retire. My annual income is Rs 40 lakh and my office pays for my accommodation, car, driver, phone, electricity and servant. I have other expenses that include travel expenses of Rs 12 lakh, medical insurance of Rs 39,000, income tax payment of Rs 12 lakh and miscellaneous household expenses of Rs 3 lakh. I have no provident fund, but I deposit Rs 70,000 every year in PPF. My wife is my only financial dependant. I have two apartments that have been let out and earn Rs 38,000 a month as rental income.
I plan to buy a car worth Rs 15 lakh once I retire and will need a driver and servant, besides paying for electricity and maintenance, the annual outgo for which should be about Rs 6 lakh. Please suggest what I need to do with my current portfolio to maximise returns and enjoy my retirement.
-R K Bhatnagar
Some want to retire comfortably, but do not know what it entails. Very few work towards a perfect retirement. You are one of those few.
It's common to find people approaching retirement worrying about their savings and whether it will be enough to meet their post-retirement expenses. Yours is one instance where the retirement plans are falling in place. You have more saved than will be necessary for maintaining the post-retirement lifestyle that you envisage. You are also well protected against the vagaries of life with adequate health insurance cover. You have no debts and you have no financial dependants barring your spouse.
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Missed opportunity
You are seeking to maximise portfolio returns now, when with a little effort you could have done better. Take for instance your strategy of maxing the Rs 70,000 investment in PPF and the remaining Rs 30,000 investment in HDFC Taxsaver to get the most of Section 80C benefits. You would have earned better returns had you invested inversely. In the long run, returns from ELSS are much higher than the 8 per cent assured return that PPF offers. Likewise, your bank balance is an unnecessary tax liability. You would be better off with this money in a liquid fund that is more tax efficient while being liquid enough for you to utilise it when needed. You should consider moving some of your debt investments into equity for better realisation and a bigger corpus.
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Final stretch
In retirement you will have lesser income, which will also reduce your tax liability. However, there will be an increase in your living expenses because you will have to pay for everything out of your savings. That you are aware of this reality should make you check out your cash-flows in the early years of retirement. If needed, cut unnecessary costs to increase the longevity of your retirement corpus.
Consider making a will and setting up an HUF or trust to manage your estate better. Not only will this be tax efficient, you will also have foresight on how your family will use your estate in future.
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- Your bank balance, PMS investment and debt fund holdings equal Rs 2.65 crore
- Exit BSL Index fund and ICICI infrastructure fund for a multicap fund
- Consider exiting DSPBR World Gold fund. You are better off with a gold ETF
Risks you face in retirement
You have worked long and hard and are looking forward to your retirement. Recent market volatility has shown how the best-laid plans can get impacted. It's critical that your retirement portfolio is able to withstand unpredictable market conditions or unexpected changes in your lifestyle. Here are the four key risks that you face in retirement. Make sure you are aware of them.
Risk: Outliving your retirement corpus
We are living longer as a result of healthy lifestyles and advances in medicine. But living longer could be challenging if you do not have a reliable income stream that will last for up to 20 years or more. Make sure your retirement portfolio generates income for that long.
Risk: Coping with rising healthcare costs
Soaring healthcare costs concern everyone. They're an even bigger threat in the years when health issues are more likely to arise. Rising costs are a reality that you should account for with adequate insurance cover.
Risk: Reacting emotionally to short-term market events
Investors are human. Behavioural finance researchers have found that when faced with uncertainty, many respond emotionally and do not always act in their own best interests. This reaction can override thoughtful planning and measured action, compromising our long-term retirement security.
Risk: Not covering your assets
You may have a house in place that you plan to retire to, but could still have the misfortune of a fire or a burglary. Make sure that the house you plan to retire to is well protected and has adequate insurance to take care of any risks to it and its contents.
This article was originally published on November 18, 2010.
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