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Planning for Twilight Years

You need investment avenues which have a low risk and generate periodic income to meet day-to-day expenses in your retirement

I am retiring in February 2015 at 60 from active service of oriental insurance of 40 years but the worst decision was that I had not opted for any pension scheme.
I owe my house and have no residual liabilities. My son and daughter are happily married and settled. I have created HUF for separate tax exemption. I own a plot in addition to my residential flat. I have around 20 lakh in bank fixed deposit and 20 lakh in mutual funds. I will get around 40 lakh on retirement, which I wish to invest in Senior Citizen Saving Scheme to take care of my post retirement monthly expense of ₹40,000. Please analyze my portfolio and advice a suitable portfolio.

- Y.P. Gupta

Overview
After retirement, our investments need to serve two very different purposes: 1) provide a stable monthly income and 2) ensure that the principal keeps growing faster than inflation so that as time passes and prices keep rising, higher monthly income can be provided.

If inflation were not a problem, then you could have just kept all your money in a post office deposit or bank or any other kind of fixed deposit and probably lived your entire retired life comfortably.
Unfortunately, that is not the case. Even if inflation remains at a modest 6 per cent, prices will double in 12 years and triple in 19 years.

Investment strategy
This means that to satisfy this dual need of monthly income and growth, you need an investment portfolio that is divided into two distinct parts, one each for the two goals. It's self-evident that the income part should be in an income-bearing deposit, while the growth part should have a substantial equity component. As time goes by, you will keep drawing from the income part, while also replenishing it with the higher returns from the growth part of your portfolio.

The income part (which also includes a ₹5 lakh emergency fund) should consist of a combination of Senior Citizen Savings Scheme (SCSS), post office monthly income scheme (MIS) and a simple savings account in a bank. In all, there will be ₹44 lakh in this category: ₹30 lakh in SCSS, ₹9 lakh in MIS and ₹5 lakh in the fixed deposit-linked savings bank account. These will be divided in your and your wife's names to minimise or eliminate any tax outgo.

The growth part will consist entirely of balanced funds, divided equally across four funds for diversification. Balanced funds provide equity exposure in a conservative way by limiting it to about 70 per cent of the assets, holding the rest of the corpus in fixed income. The returns are also tax-free if the funds are held for more than a year. You will start of with Rs 36 lakh in the growth part of your portfolio.

Every month, the SCSS and the MIS will generate Rs 30,000. The remaining ₹10,000 you should withdraw from your fixed deposit-linked savings account. Every year, move money from the balanced funds to your savings account to maintain ₹5 lakh in it. At some point, you will find that ₹40,000 is no longer enough. Use the savings account for increased withdrawals.

To reach the above distribution, take the following actions: of the ₹40 lakh that you will get on retirement, put ₹30 lakh in SCSS, ₹9 lakh in MIS and ₹1 lakh in the savings account. Of the ₹20 lakh FDs you have, move ₹4 lakh to the savings account and invest the rest in balanced funds recommended here for the growth part. Do the same with the ₹20 lakh you currently have in mutual funds.

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