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Hariprasad, 58 and a Senior Vice-President in a company, wanted to know if he could retire with investments accumulated till date. He sought peaceful retirement.
He was also offered a consultant role in the group company to extend his services with a consolidated pay of ₹1.5 lakh per month.
He has been systematically investing in equity mutual funds for the past 18 years. Recently, he diversified by investing in debt mutual funds as well. As part of his salary structure, he was investing in EPF and VPF. He was also wise enough to choose NPS as an addition to his well-diversified portfolio. He saved 30-50 per cent of his monthly income. He spent around ₹30 lakh for his daughter’s wedding.
He and his wife needed ₹75,000 per month for their expenses, after retirement. He also wanted about ₹60 lakh towards his family’s health needs in addition to his comprehensive health insurance, as a safety net. He and his wife would need around ₹30 lakh for charity work, travel and hobbies. He is living in his own house, which is 15 years old and would need another ₹30 lakh towards maintenance for the next 15-20 years. He may shift his residence to another property after a few years.
He was also concerned about the rising living costs, changes in lifestyle with more dependency on appliances and gadgets, costs associated with assisted living, economic challenges such as lower interest rates and higher taxes. There was a need of certainty in his income to manage expenses. He is a very mature long-term investor and has a growth risk profile. Though he has the risk appetite to opt for 60 per cent equity exposure, he wanted to reduce his equity holdings. We too advised him to not go beyond 40 per cent exposure to equities in his overall portfolio.
Retirement expenses
We decided to work on two investment projects for him. The first one is for retirement expenses where he will draw monthly income of ₹ 75,000 in the first year and it will increase by 5-7 per cent every year.
With an estimated life expectancy of 100 years for him, the calculation showed ₹3.14 crore of corpus at an expected return of 8 per cent per annum, net of expenses and taxes. This was feasible with roughly 30 per cent equity exposure.
We had allocated full EPF accumulation (₹2.3 crore) and 42 per cent of equity mutual funds (₹84 lakh) towards this need. This would have to be rebalanced and mapped to multiple baskets to get monthly income with various products and strategies.
Different baskets
He would manage the first two years of expenses with staggered fixed deposits till the age of 60. This comprises only fixed deposits, labelled as Basket 1.
It was suggested that he include the Senior Citizen Savings Scheme, RBI Bonds and other safe avenues and bonds to get approximately ₹6,86,750 from his age 61 as interest income. This interest income will be derived from ₹95 lakh of his total retirement corpus allocated to Certainty basket, labelled as Basket 2. This basket will continue to provide interest income till he turns 100, with return of capital.
Basket 3 will be constructed with fixed income investments and 20 per cent equity allocation through mutual funds for ₹1,08,50,000. This portfolio will be withdrawn from his age 61 to 76 years to manage the expenses above ₹6,86,750 per annum.
Basket 4 will be constructed with 50 per cent allocation to equity for ₹35 lakh. This portfolio will help manage expenses from his age 77 till 86 years over his regular expenses of ₹6,86,750 per annum.
Basket 5 will be constructed with 100 per cent equity allocation to manage his expenses from his age 87 till 100 years. Annual reviews were recommended to manage asset allocation strategies.
Long-term portfolio
For the rest of his needs and goals, the second investment project was recommended. It was suggested that he consolidate his other investments such as FDs, NPS, PPF, Balance Equity MF portfolio, debt mutual funds and PMS in a long-term portfolio worth ₹4.09 crore. This portfolio currently has 50 per cent equity exposure. It was advised to reduce this exposure to 40 per cent immediately and to 30 per cent in the subsequent 5-7 years. As this portfolio has FD, NPS and PPF, any liquidity needs can be managed with withdrawals and expected annuity.
It is quite common for retirees to spend more in the first year of retirement. This is because of the corpus, which many perceive as huge, in hand. In addition, they also buy products with lock-in periods for want of high yields. Adequate liquidity and a right mix of assets are vital to a peaceful retirement life. The flexibility to adapt to the changing macro dynamics also has to be considered and this requires professional guidance too at times. Tracking expenses and keeping a check on expenses is important.
Building an adequate corpus and setting the portfolio with a right mix are two different games in a retirement portfolio. It may not be possible to eliminate risk, which leads to permanent loss of capital at a security level, but an investor has to do it in a portfolio context. That’s where asset allocation and choice of investments, considering one’s own needs, take prominence. Be cautious and diversify adequately to cover the risks!
The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI
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