Renu, 65, received Rs 3 crore after the unfortunate demise of her husband. She has a daughter, who is going to get married in a few months. Renu wants us to draw up a financial plan for her so that she can generate sufficient income from her investments.
Renu must have an emergency corpus of about Rs 6 lakh (equal to six months of expenses). It should be kept in a savings account or in a sweep-in fixed deposit for higher returns. A sweep-in deposit is linked to your savings account. If the balance in the savings account falls below the threshold set, money is automatically moved from the sweep-in deposit to your savings account.
Renu doesn't have life or health insurance. She doesn't need life insurance as her daughter is fairly independent. Also, Renu's assets are enough to take care of her daughter in the event of her death.
However, buying a health-insurance policy is a must to protect one's wealth from a significant health-related expenditure. Renu should buy a senior-citizens health cover of at least Rs 5-7 lakh. While purchasing it, she should consider co-pay and sub-limit clauses and the waiting period involved. Renu's daughter should also get an adequate health insurance cover if she doesn't have one already.
Health-insurance policies often come with a co-pay clause for senior citizens. It mandates that a certain portion of the medical bill, say 10 per cent, should be borne by the policyholder. The sub-limit clause further caps the reimbursement of expenditure on room rent, ICU, doctor's fees, etc. The upper ceiling of such expenses is usually mentioned as a certain percentage of the total health cover.
Also, she should consider the waiting period. Although senior citizens health-insurance policies have a lower waiting period, she should still inquire about it. This is the period during which the policy does not cover any pre-existing or other specified diseases.
She should also ensure that the hospitals close to her residence, especially the one she usually consults at, are empanelled with the insurance company. This will help her use the 'cashless claim' facility.
Renu estimates her daughter's wedding expenditure to be about Rs 50 lakh. She has around Rs 83 lakh in her bank account. A part of this can be used for the wedding.
Generating income in retirement
Renu will be left with Rs 2.5 crore for her retirement after she has taken care of her daughter's wedding. To generate a regular income, she can follow the following investment steps.
1. Invest the amount (Rs 18 lakh) needed for the expenses of the next 18 months in a liquid fund and set up a systematic withdrawal plan (SWP) for your monthly expenses (Rs 1 lakh).
In an SWP, you invest a lump sum in a fund and give instructions to the fund house to withdraw a defined amount every month directly into your bank account. She should opt for the growth plan of the liquid fund instead of the dividend plan as a growth plan is more tax-efficient.
2. Invest the amount (Rs 36 lakh) needed for the expenses of the next three years in an ultra-short-duration fund. Set up an annual systematic transfer (STP) of Rs 12 lakh to your liquid fund.
Setting up an STP requires that both the funds be of the same fund house. However, in the case of different fund houses, one can first redeem the desired amount and then invest it in a different fund. This way, the money collectively parked in the liquid and ultra-short-duration funds and the bank account should be sufficient to meet her expenses for the next five years. Liquid and ultra-short-duration funds are less volatile and comparatively safer.
3. Renu is now left with Rs 1.9 crore, which should be invested equally between debt and equity. The equity component will help her beat inflation in the future. Relying purely on debt would force her to lower her expenses later.
For debt exposure, she can go in for a couple of good short-duration funds. She should not venture into any other debt product, such as credit-risk funds, as they may put her money at a higher risk.
For equity, she can invest in two or three top-rated multi-cap funds. Multi-cap funds are pure equity funds which invest in companies of all sizes, across all sectors. They are suitable to invest money which is not required for at least the next five years. It is important that this amount be invested over a period of 12 months instead of as a lump sum. This will prevent her from catching a market high.
4. Since the money required over the next four to five years has already been taken care of through liquid and ultra-short-duration funds, that gives ample time to the money parked in equity funds to grow. Thereafter, she may annually withdraw a part of the money parked in short-duration and multi-cap funds to refill the ultra-short-duration bucket for her monthly expenses while maintaining a 50:50 allocation between equity and debt. A 50 per cent debt allocation will give her enough cushion to stabilise the returns. On the other hand, a 50 per cent allocation to equity will help Renu beat inflation.
Renu may have to actively rebalance her asset allocation, especially when the equity market tanks. She will have to withdraw more from debt and less from equity in such a scenario. She should also ensure that her annual expenses don't exceed 4-6 per cent of the total corpus so that she doesn't run out of money in retirement.