The income pursuit of an elderly couple
Mrs and Mr Verma are a retired couple looking to derive regular income from their investments. Here is how the SCSS and mutual funds can help
By Research Desk | May 23, 2019
Ms Rashmi Verma (63) and Mr Sandeep Verma (63) are ex-RBI officials, getting a combined monthly pension of Rs 50,000. Their monthly expenses are Rs 78,000, which include a home-loan EMI of Rs 18,000. The couple owns two houses and has Rs 60 lakh in bank deposits. Their children are married and financially independent. The couple wants us to develop a financial plan so that they can derive a regular monthly income from their investments.
The emergency fund acts as a cushion during difficult times and hence is the foundation of a financial plan. It should be equivalent to at least six months of your expenses. Mrs and Mr Verma should accordingly maintain an emergency corpus of at least Rs 4 lakh. This money should be parked in a combination of a savings bank account, sweep-in fixed deposits and short-duration debt funds. This will help them to earn a higher return without compromising on liquidity.
Action: Maintain an emergency corpus of Rs 4 lakh.
Mrs and Mr Verma don't have a life cover. Nor do they need one. You need a life cover only if you have financial dependants. The basic purpose of buying life insurance is to provide for living expenses and other non-negotiable requirements of your dependants in your absence. While some may buy life-insurance products with an investment component, this should be avoided as they generate mediocre returns. If you do want to buy life insurance, go for a term cover.
Action: Continue to stay away from insurance products with an investment component.
Being ex-RBI officials, both Mrs and Mr Verma are covered under a group health plan. However, considering their ages and the rising medical cost, they should buy an additional senior-citizen health-insurance policy. Also, they should ensure that the hospitals in their vicinity are empanelled with the health insurer they choose. A Rs 5 lakh floater cover would cost them around Rs 3,500 to Rs 4,000 per month.
Action: Don't rely only on group insurance. Buy a senior-citizen health-insurance plan.
One of the two houses that they have has an outstanding home loan of Rs 6 lakh. They should pre-close the loan with the available funds. There is no point in continuing with a liability at this age, especially when you have funds available. Paying off the loan will not only reduce the monthly expenditure by Rs 18,000, but will also relieve the old couple from the burden of a liability.
Action: Pay off your outstanding home loan. There is no point continuing with a loan in old age when you have the required funds.
The couple needs approximately Rs 65,000 (including the health-insurance premium) every month for its living expenses after paying off the home loan. Out of this, they are already getting Rs 50,000 through pension. For the balance, they should invest Rs 22 lakh in Senior Citizen Savings Scheme (SCSS). SCSS is a government-backed scheme which provides a guaranteed annual return of 8.30 per cent. Investing Rs 22 lakh would fulfil the monthly requirement of Rs 15,000 through a quarterly interest payout.
Although, SCSS has an upper investment limit of Rs 15 lakh, the couple can collectively invest up to Rs 30 lakh by opening two accounts. Being senior citizens, Mrs and Mr Verma both fulfil the eligibility criteria of opening an SCSS account in their individual capacity as the first holder. They can further name each other as the second holder and go for a joint account.
The remaining funds should be invested in two or three aggressive hybrid funds through a systematic transfer plan (STP). These funds invest 65-80 per cent in equity and the rest in debt. A higher exposure to equity will help the couple earn inflation-beating returns, while a small exposure in debt makes returns less volatile. It is important to spread the investment over a period of time. Otherwise, you run the risk of catching a market peak.
The duration of an STP should be decided on the basis of the quantum and the importance of the money to the couple. If the money has been earned over a lifetime and is very significant, as is the case with Mrs and Mr Verma, it should be spread over a period of three years. This way you have ample time to average out the purchase cost. Don't extend the period beyond that as it could lead to missed opportunity.
Action: Invest Rs 22 lakh in SCSS and Rs 28 lakh in hybrid aggressive funds through an STP over a period of three years.
Keep in mind
1. Always maintain an emergency corpus that is equal to at least six months' expenditure.
2. If you don't have financial dependents, you don't need life insurance.
3. Even if you have employer-provided health cover, buy an individual cover as well.
4. Senior Citizen Savings Scheme is a good investment option for the elderly for assured income.
5. Old age doesn't mean staying away from equity altogether. Equity is important in old age to take care of inflation.
6. Go for aggressive hybrid funds as they provide equity advantage at low volatility.
7. Don't invest a lump sum in equity. Take systematic exposure through SIPs/STPs.
8. The duration of your STP should be determined by how crucial the amount to be transferred is. But it shouldn't exceed three years.