After the first four life stages, we now end the series on financial planning with the retirement stage.
27-Nov-2006 •Research Desk
Goodbye tension! Hello pension!
We hate to use the oft quoted cliché of retirement being the 'golden age'. But if you look at it objectively, it could very well be a thoroughly enjoyable part of your life.
Let's say you have touched 60 and your children are well settled and independent. No more stress of getting up every day and trudging along to work. It's time to catch up on your reading and all the stuff you put on hold all these years. And probably enjoy the company of your grandchildren too.
The only worry is that since you have stopped earning, your investments must be sufficient to tide you over for the rest of your life.
The main challenge is to continue to be financially independent, and that will largely depend upon how well you had gone about your financial planning in the previous four stages.
If you were meticulous enough to go about saving and investing in a systematic way, then leading a financially independent retired life should not be an impossible task even for an average middle-class individual.
Generation of regular and dependable income for day-to-day expenses
Senior Citizen Savings Scheme and the post office Monthly Income Scheme are the best options with a 9 per cent and 8 per cent return respectively. Your principal is safe, your interest payments are guaranteed with regularity and the returns are fixed. The SCSS has an upper limit of Rs 15 lakh and in MIS, you will be restricted up to Rs 6 lakh in a joint holding. If you cannot exhaust both these limits, then park a larger amount in the SCSS.
Bank deposits have also become an attractive avenue these days. Some banks are offering a yield of 8 per cent on an 18-month deposit. Earning 8 per cent assured interest with a short lock-in period will suit your needs well. Senior citizens get slightly higher rates.
If you have a Public Provident Fund account running, it will continue to be attractive even post-retirement. The first reason being the tax-free 8 per cent interest earned. Though it does not provide a regular stream of income, you can 'create' it for yourself. After the initial lock-in tenure of 15 years, you can withdraw it once a year. This will enable you to keep transferring an appropriate amount from your PPF account to your savings account each year to meet your expenses.
Maintaining adequate liquidity to meet unexpected expenses such as health issues
For your emergency requirements and sudden health expenses, keep the funds parked in a bank account.
Alternatively, you can even have a flexible bank deposit whereby your money is kept in a fixed deposit but you can break a portion of the deposit should you need some money. The balance will continue to earn the rate of interest while the portion you need will be credited to your savings account.
Wealth generation for indulgences like a vacation or making a pilgrimage
While wealth generation will not be the main focus of your investment planning, neither should you ignore this aspect totally. After you allocate money to fixed return investments to get a regular income and keep some aside for liquidity requirements, you can keep the balance for this purpose.
Money for this purpose can be invested in index funds, large-cap oriented diversified equity funds and hybrid funds. As a ballpark estimate, having 20-30 per cent in equities is not a bad idea.
If you not having sufficient funds to cater to all the above three goals of income, liquidity and growth, don't consider equity. If you are of the opinion that all your savings are indispensable and whatever income they can generate is crucial for you, then stick to an equity-free portfolio.
Lesson to be learnt
Running short on finances? Do away with wealth generation and keep your goals restricted to liquidity and income generation. However, if you are living with your children and they are taking care of all your day-to-day expenses, then you can focus on liquidity, a small portion as regular income for your personal expenses as well as wealth generation.