The Plan

Plan for a newly retired person

Essential financial and investment checklist for a family man who has just retired

Plan for a newly retired person

Mahendra (56) is retired and lives in his own house with his wife (46) and two daughters. His wife is a homemaker. Before he retired, Mahendra was employed in the Middle East as a chartered accountant. He has accumulated a corpus of Rs 2.30 crore and has also invested in a piece of land, whose current worth is Rs 35 lakh. His financial goals are his daughters' weddings and a comfortable post-retirement life. Here is a financial plan for him.

Emergency fund
A good financial plan starts with provisioning for emergencies. The emergency corpus should be equal to six months' expenses. Mahendra's monthly expenditure is about Rs 85,000. Hence, he should maintain an emergency corpus of Rs 5.10 lakh. It should be maintained in a combination of a sweep-in fixed deposit and short-term debt funds. This will ensure both liquidity and decent returns. He can find good quality short-term debt funds on the Value Research website.

Action: Maintain an emergency corpus of Rs 5.10 lakh.

Life insurance
Although Mahendra has dependents, he doesn't need a life cover as he has accumulated sufficient corpus to take care of his dependents in his absence. So he is right in not buying a life cover. Also, he has been wise enough to stay away from endowment and unit-linked insurance plans. Such plans provide neither sufficient insurance nor good returns. They lack transparency as well.

Action: Continue to stay away from endowment plans and ULIPs.

Health insurance
Medical emergencies can dent your financial plan. It is very important to have a sufficient health cover to keep your finances on track. Mahendra has a Rs 10 lakh health cover, which also covers his wife and daughters. This should be sufficient for the family. However, he can also consider buying a critical-illness cover, which is especially important in old age.

Action: Maintain the existing health cover.

Daughters' weddings
Mahendra wants to spend Rs 50 lakh each on his daughters' weddings. He estimates his elder and younger daughters' weddings to be two and four years away, respectively.

He should invest Rs 45 lakh in short-duration debt funds for his elder daughter's wedding. Assuming a conservative post-tax return of 5 per cent, it would fetch him close to Rs 50 lakh in two years' time. For his younger daughter, he can make an investment of Rs 36 lakh in conservative hybrid funds or Equity Saving Funds. He will be able to accumulate the required amount in four to five years at a conservative post-tax return of 7 per cent. Conservative hybrid funds invest around 10-25 per cent in equity and the remaining in debt. A higher exposure towards debt makes them less volatile and suitable for a four- to five-year time frame. On the other hand, the smaller allocation to equity gives a boost to overall returns.

Action: Invest Rs 45 lakh and Rs 36 lakh in short-term debt funds and conservative hybrid funds, respectively.

Living expenses
Mahendra will be left with Rs 1.49 crore after keeping aside the required amount for his daughters' weddings. Assuming a return of 10 per cent per annum on this corpus, he will get about Rs15 lakh per annum. Again, if he consumes 60 per cent of it and saves 40 per cent to counter the effect of inflation, he will have Rs 9 lakh to spend. This comes to about Rs 75,000 per month, which is less than his current monthly expenditure.

He can consider reducing the expenditure on his daughters' weddings or his monthly expenditure or he can look for some alternate source of income to bridge this shortfall.

Action: Bridge the shortfall in monthly income in post-retirement years.

Mahendra has invested in various categories of debt funds. His mutual fund portfolio is tilted towards credit-risk schemes and also consists of a few funds with poor star ratings. Credit-risk funds try to benefit from an upgrade in the credit quality of their debt papers.

Mahendra should move his retirement corpus in a couple of short-duration funds. Setting aside an amount equal to three years' expenses, he should transfer the rest to a couple of good quality aggresive hybrid funds over a period of three years. The returns from aggresive hybrid funds will make sure that he is able to not just beat inflation but also grow his corpus well.

Mahendra has also invested Rs 15 lakh in stocks and gold ETFs and further plans to start actively trading in them. It is not a good idea to invest in gold as the returns are very low. Also, trading in gold and stocks can be very risky. Mahendra should abstain from trading in stocks. However, if he can do stock research on his own and can track his portfolio of stocks consistently, he can make long-term investments in them. Otherwise, he should limit himself to mutual funds.

Further, Mahendra should consider disposing of his investment in land, provided he is not emotionally attached to it. Land usually has a high maintenance cost and generates low long-term returns. He can move the proceeds to his aggresive hybrid funds systematically.

Action: Consider liquidating your investment in land.

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