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Gearing up for the second innings

Here's how 59-year-old Mukesh can grow as well as protect his capital during retirement

Mukesh, a central PSU employee, will retire in June 2017. His wife is financially dependent on him, while his children are settled. On retirement, he will get Rs 55 lakh and a pension of Rs 10,000 per month. Apart from this, he has savings of Rs 40 lakh. Here is a post-retirement financial plan for him.

Savings & investments Amount (Rs)
MFs 2258235
FD 400000
Savings 500000
PPF 896595
Retirement benefits (as in Jun 2017) 5500000
Total 9554830
   
Monthly household expenses 30000
EMIs (till June 2017) 66000
   
Insurance  
ICICI pru Save n Protect 29942
ICICI Pru Save n Protect 59530
ICICI Pru Life Assure Wealth Super 30000
ICICI Life Stage Pension 15000
Bharati Axa Future Secure pPension 25000
LIC New Jeevan Suraksha 10001

Emergency fund
Mukesh must have a sufficient emergency fund to meet any unforeseen expenditure. It should be around six months' expenses, i.e., Rs 1,80,000. He can park it in a savings account with the sweep-in facility.

Medical expenses
Mukesh has employer-provided health insurance, which will continue even during his retirement days. He must check the exclusions in it and buy a super top-up health cover for himself and his wife.

Health-related expenses tend to jump in old age. He should earmark Rs 5 lakh for any unforeseen medical expenses and park it in his savings account with the sweep-in facility.

Insurance
Mukesh should surrender his existing insurer-provided pension plans and other life-insurance policies as they provide neither sufficient returns nor adequate insurance.

Planning for retirement

We have developed the following two scenarios for Mukesh's retirement.

Conservative plan
On retirement, Mukesh will get Rs 55 lakh. Of this he can park Rs 30 lakh in the Senior Citizens Savings Scheme (SCSS), Rs 15 lakh each in his and his wife's names. The remaining Rs 25 lakh can go in the debt funds (any two) that we have recommended.

At 8.6 per cent per annum, the SCSS will generate an annual interest income of Rs 2.58 lakh (monthly income Rs 21,500). This clubbed with his pension (Rs 10,000) will enable him to meet his monthly requirement of Rs 30,000. The investments in the SCSS will fetch him a tax deduction under Section 80C, but the interest income will be taxed as per his tax slab.
The investments in the SCSS are capital-protected, i.e., he will get his Rs 30 lakh back at the end of the tenure (five years) of the SCSS. After five years, he can repeat the process and park Rs 30 lakh in the SCSS for another five years.

The interest on the SCSS is paid out on a quarterly basis. The amount received from the SCSS can fluctuate with changes in interest rates.

Mukesh can transfer his current investments of Rs 40 lakh and the Rs 25 lakh in debt funds to the recommended balanced funds (any two) through SIPs over 30 months. He can withdraw from them for future income gaps.

With this scenario, his pension corpus will last for 20 years.

Growth plan
After adjusting for the pension of Rs 10,000, Mukesh can invest three years' household expenses (Rs 7.2 lakh; Rs 20,000 per month) in debt funds. The rest of the corpus can be transferred to the balanced funds (select any two from the list) over 30 months through SIPs. During the period of transfer, the amount can sit in the debt funds (any two).

Mukesh will need to replenish the amount in debt funds every three years by transferring money from the balanced funds. The amounts that he will need to transfer are given in the table on the adjacent page.

The amounts have been calculated assuming that the debt funds will grow at an average rate of 8 per cent per annum and the balanced funds will grow at an average rate of 12 per cent per annum.

We have considered 8 per cent hike in the annual expenses. We have also assumed Mukesh's pension to be inflation-adjusted.

With this scenario, Mukesh can meet a withdrawal of Rs 2.2 crore over a period of 25 years and will still be able to leave a legacy for his kin.

Equities for retirement
In this plan, we have taken balanced funds, which invest in both equity and debt. While the equity component of balanced funds provides growth of capital, the debt component cushions the fall during bear markets and makes them the ideal funds to take care of your retirement corpus.

Let's say that Mukesh retired ten years ago and followed the growth plan. He invested in Birla SL Cash Manager (the debt fund) and Franklin India Balanced Fund (the balanced fund), which were in our recommendations list ten years ago. Thanks to the growth of the balanced fund, he would still have Rs 89,15,535 now. That's a huge sum left. This shows how equities can do wonders for your retirement corpus.