The second innings | Value Research Smita has retired from work at 49 and plans to start her own business. Here is how she can do this while also ensuring a regular income
The Plan

The second innings

Smita has retired from work at 49 and plans to start her own business. Here is how she can do this while also ensuring a regular income

Smita (49) has recently taken early retirement from her job. She received Rs 50 lakh as the post-retirement benefits and has around Rs 85 lakh in her EPF account. Her husband, Atul, is of the same age and works in the telecom industry. His monthly take-home income is Rs 95,000. His EPF account balance and PPF investments together amount to Rs 93 lakh. The couple also holds Rs 32.5 lakh in equity mutual funds. Smita is planning to start her own travel business and has a few other goals for which she wants us to draw a financial road map.

Emergency fund
Smita and Atul have a monthly expenditure of Rs 90,000. They have an emergency corpus of Rs 10 lakh, which is sufficient to meet their expenses for about a year. Typically, an emergency corpus should be equivalent to six to eight months of your expenses. But it is fine to maintain a corpus which is capable of meeting your expenses for even longer. However, Smita should not increase her emergency corpus beyond this point as it may result in an opportunity loss.

The emergency corpus should be kept in a combination of sweep-in fixed deposits and short-duration debt funds. This ensures both liquidity and better returns.

Action: Don't increase the emergency corpus further.

Health insurance
The couple has individual health-insurance policies of Rs 3 lakh each. Given their age, they may want to increase their health covers to Rs 5-7 lakh. Also, they can port their insurance to a combined floater cover, which may work out to be less expensive than two separate covers. Porting their existing covers will help them to continue enjoying benefits such as coverage of pre-existing diseases and no-claim bonus, if any.
Also, they should buy a critical-illness cover of at least Rs 10-15 lakh. A critical-illness cover pays a lump sum on the diagnosis of a specified serious diseases like cancer, organ failure, etc., the treatment of which tends to be expensive.

Both Smita and Atul have personal-accidental and disability covers of Rs 50 lakh each. While they are on the higher side, given their accumulated corpus, it's okay to maintain them.

Action: Raise your health-insurance covers. Buy a critical-illness cover.

Life insurance
Smita and Atul have invested in unit-linked insurance plans (ULIPs) and endowment insurance. But they don't need a life cover as they don't have financial dependents. They should consider surrendering these policies and investing the proceeds in equity funds for higher returns over the long term.

Generally speaking, one should avoid buying ULIPs and endowment plans as they neither provide good insurance nor sufficient returns. Investment and insurance should be kept separate. Combining them results in sub-optimal outcome. For life insurance, go for term plans as they provide a large cover at low cost.

Action: Consider surrendering your ULIPs and endowment plans and invest the proceeds in equity funds for higher returns.

Smita wants to use her accumulated corpus and retirement proceeds to generate an income of Rs 50,000. Her total retirement proceeds amount to Rs 1.35 crore, including her EPFO balance of Rs 85 lakh. The interest earned on EPF post retirement is taxable. Hence, Smita should withdraw her EPF and invest it in equity mutual funds. This will also help her earn better returns. She can go for three-four aggressive hybrid mutual funds and invest the EPF proceeds over a period of three years. Doing so will reduce the risk of catching a market high.

She should park Rs 30 lakh in two short-duration funds. This money will help her meet her expenses for the next five years. Post that, she can transfer money needed for her annual expenses from hybrid funds to short-duration debt funds. But the withdrawal rate shouldn't exceed 6 per cent. This will ensure that the corpus itself isn't depleted.

Atul wants to have a monthly income of Rs 40,000 in retirement. So, he would need a corpus of Rs 2.51 crore. His EPF contributions would fetch him around Rs 1.76 crore when he retires at 60. In addition, he has a PPF account due for maturity in a few months. It will fetch him Rs 31 lakh. This amount should be invested in two good flexi-cap funds over a period of 18 months to two years. This will ensure that he is able to meet the deficit (assuming an annual return of 12 per cent).

Action: Invest your retirement proceeds in aggressive hybrid funds over a period of three years. Move PPF proceeds to equity funds.

Other goals
Smita loves travelling and wants to start her own travel-related business with Rs 10 lakh. She would be left with Rs 20 lakh after taking care of her retirement. She can use a part of this amount to start her business.

Smita and Atul want to collectively spend Rs 26 lakh on the weddings and education of their nephews and nieces. Of this, they would need around Rs 6 lakh in one to two years, while the rest would be needed over five to 10 years. The upcoming requirement of Rs 6 lakh can be fulfilled by the remaining balance of Smita's retirement proceeds.

Smita and Atul collectively hold Rs 32.5 lakh in equity funds. Of this, they can earmark Rs 16 lakh for the weddings and education of their nephews and nieces. They should start withdrawing the required amount systematically 12-18 months before the goal falls due. This will help them to reduce the risk of exiting at a market low.

The couple wants to go for a foreign vacation every two years and estimates that it would cost around Rs 6 lakh. For this, Atul should set aside Rs 25,000 to Rs 30,000 every month in an ultra-short-duration fund. This corpus should be sufficient for the next four to five vacations during his working life. The rest of the monthly surplus should be invested in equity funds. This can later take care of a few more vacations during Atul's retired life.

Action: Use a part of your retirement proceeds and equity funds to take care of other goals.

Smita and Atul's mutual fund portfolio consists of around 20 schemes spread across various categories. Investing in too many funds leads to unnecessary operational and monitoring hassles. For long-term goals, it's enough to have three-four flexi-cap funds in your portfolio.

They have also invested in some closed-end schemes and opted for the dividend option in case of a few funds. Closed-end funds are not liquid and force you to invest a lump sum. Therefore, invest in open-end funds. Also, one should always opt for the growth option to create long-term wealth. In dividend plans, a part of the corpus is paid periodically as dividend. You lose on the benefit of compounding over the long term on that part. Also, dividends from equity funds are liable to dividend distribution tax (DDT) of 10 per cent, which unnecessarily reduces your returns.

Action: Reduce the number of funds in your portfolio. Invest in the growth option of open-end funds for long-term wealth creation.

This story was first published in February 2019.

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