Financial Planning . How to manage liquidity after retirement

‘K’, aged 62, approached us for help with his retirement income distribution. He is a retired private sector employee. Thanks to his habit of saving regularly over the years, he has a corpus which would be more than sufficient to fulfil his needs, if allocated properly across multiple asset classes.

At this point, it would be worthwhile to recall Peter Kaufman who said: “The most powerful force that could be potentially harnessed is dogged incremental constant progress over a very long time frame.”

K lives with his wife ‘R’, aged 60, in Bengaluru. His two daughters are settled in Pune and Chennai. He owns a flat each in Bengaluru and Chennai. The flat in Chennai is rented out.

Here is a simple representation of their current financial position, based on the data the couple provided.

K was worried about the recent market volatility and had opted for mutual fund investments for its easy management and liquidity.

His wife was disinterested in learning about managing money at this age. She wanted a regular income of ₹50,000 per month, which would be more than sufficient to run the family.

They spend ₹30,000 a month towards living expenses, including food, communication, city travel, local expenses, flat maintenance, house maid salary, electricity and so on. R wanted to keep ₹20,000 per month towards annual expenses such as clothing, gifts for daughters and annual medical check-ups.

K’s main worry was the liquidity of his investments and how his wife would manage the money in his absence.

His goals were redefined as follows:

1. Emergency fund of ₹6 lakh to be maintained in his savings account with a float option

2. Medical emergency fund of ₹10 lakh to be maintained in fixed deposits in his bank account

3. Monthly income of ₹50,000 from his investments after rebalancing, based on his risk profile

4. Annual travel expenses would be funded by his rental income

He was willing to take moderate exposure to equity, but his exposure was 80 per cent. He wanted to bring it down to less than 30 per cent of his overall portfolio.

Investments recommended

We recommended that he invest ₹15 lakh in Pradhan Mantri Vaya Vandana Yojana and ₹30 lakh in Senior Citizen Savings Scheme in his and his wife’s names as two deposits; ₹20 lakh in RBI taxable bond at the current interest rate of 7.75 per cent per annum. All these investments put together would give him ₹5.15 lakh per annum as regular income. We explained about the safety of capital and sovereign guarantee products, post retirement.

We also advised him to segregate his mutual funds into a retirement and a wealth portfolio. His retirement portfolio would have ₹77 lakh in high-quality debt mutual funds with lower volatility and ₹38 lakh would be invested in balanced mutual funds, which would help him fund the deficit towards annual expenses through systematic withdrawal plans (SWP).

This would leave a surplus of ₹1.6 crore in his mutual fund portfolio. We advised him to invest 40 per cent of this corpus in large- and mid-cap funds and the balance 60 per cent in debt mutual funds.

Reducing equity exposure

Overall, this will bring down his total equity exposure to 25 per cent and his retirement portfolio will have around 15 per cent exposure to equity. This segregation will help him reduce the risk component without compromising on liquidity. His regular income is divided into multiple safe instruments, which his wife can easily understand.

We advised him to reserve his rental income towards annual travel expenses. With this strategy, even if there are one or two months of non-occupancy, his lifestyle will not get affected. We also estimated that his flat may require regular repair works for which he might have to spend around ₹1 lakh once in three years, which could be funded from his wealth portfolio. We recommended that he manage his tax savings with regular investments in Section 80C products such as equity-linked savings scheme (ELSS). We also discussed with him on transfer of his assets to his wife and daughters when the need arises, and necessary steps in that direction were initiated.

The writer is an investment advisor registered with SEBI