FINANCIAL PLANNING FOR RETIREES

Investment Yogi: Financial planning tips for life after retirement for senior citizens

Today’s senior citizen has many more challenges to face than in days past e.g. the increasing inflation and healthcare costs. They also have to look at the threat of capital erosion and fluctuating interest rates. With smart planning an older couple/individual  can manage the above concerns and other key aspects that one needs to consider during retirement years. 

STEP-1: SET ASIDE MONEY FOR UNEXPECTED EXPENSES

Place aside 15-20% of your retirement corpus in easy-to-convert-to-cash investments to take care of any sudden, unexpected emergencies. This will help you to tide over emergencies like sudden medical expenses, diagnostic tests and/or hospitalization, without you having to break your fixed deposit(s). You may set aside this amount in a combination of bank savings account, bank multi-deposit savings account (also called a bank flexi-deposits), short-term bond mutual funds and/or liquid mutual funds. The idea is to have cash readily available in case you require it immediately for short-term contingencies. Remember, even if you have an insurance cover, you will almost always be required to cough up a percentage of expenses. Keeping an emergency fund will benefit you immensely during times of crisis, without you having to depend upon anybody for financial backing.

STEP-2: PURCHASE A HEALTH INSURANCE POLICY

The majority of retired government employees hold hospitalization coverage from their employer. However, in almost all circumstances the cover is insufficient. Also, citing the ever increasing inflation and medical costs, it is advisable for all senior individuals to go for a separate health insurance cover and not depend solely on employer-sponsored health schemes. Purchase one immediately upon retirement or now, if you haven’t purchased one yet. Ensure you have medical insurance to cover you until the time you're eligible for health insurance. The relief of having your medical costs insured during your golden years is invaluable.

Nowadays, there are many health insurance policies designed exclusively for the elderly (> 60 years of age). You can go for an individual health insurance policy or a joint policy for you and your spouse. The coverage of a health insurance policy may range from hospitalization expenses, to outpatient department (OPD) expenses coverage. Choose the one with maximum inclusion, maximum coverage and lowest cost of premium. 

STEP-3: ANALYSE YOUR FINANCIAL SITUATION

Ask any retired person about his/her financial requirements and you most often get the answer - safety of retirement corpus, regular income to cover monthly expenses, a comfortable home to live in, and enough money to pursue new interests. Having provided for contingencies and health insurance cover, analyse your current financial state of affairs. Now is the time to start thinking about how you'll take care of your retirement money. 

Examine your current portfolio and asset allocation. [Asset allocation means combination of existing investments in varying proportions as per your risk profile. Asset allocation is different for different age groups and individuals].

During retirement, your spending is likely to be more than your income. As such, too much of physical asset allocation (such as investment in real estate) can land you in a soup in case of any emergency because real estate is an illiquid asset. To earn a regular monthly income, maintain safety of one’s capital and hedge the portfolio against inflation, one needs to have a proper balance of debt, equity, real estate, cash and gold in one’s portfolio. Holding entirely fixed income will diminish your real returns (i.e. post tax, post inflation-adjusted returns). Similarly, holding entirely equity in the portfolio carries the greater risk of losing your capital altogether. The key is balance and diversification - have a balance of equity mutual funds, fixed income (such as government saving schemes, bank fixed deposits, etc.), gold, real estate and cash for growth, safety, liquidity and diversification of portfolio.

Asset allocation guide for retirees - Following is a general guide on asset allocation for retirees.

Allocate 60-65% of portfolio in Fixed Income products; this will offer maximum safety and stable returns from your invested money. This is your best bet for regular income. Such income can be used to provide for monthly expenses, channel it to a recurring deposit account, and/or meet non-discretionary expenses (such as annual maintenance of house, buying presents for loved ones during festivals and celebrations, pilgrimage visits, etc.). 

Form of investment - bank term deposits, government savings schemes, immediate Annuity Pension Plans (for example, LIC’s New Jeevan Akshay and HDFC Immediate Annuity), debt mutual funds and long-term bonds (such as Infrastructure bonds, RBI Relief bonds, etc.).

Investments in Equity mutual funds (15-20%) will allow superior returns necessary for growth of your portfolio.

Form of investment - large-cap Equity Diversified Mutual funds, Equity-linked Saving Schemes (ELSS), and Index funds/Index ETFs. 

Gold will provide to your portfolio the required hedge against the inflation monster. However, ensure maximum investment of 5-10% of your portfolio. 

Form of investment - physical gold (jewellery, gold bars and coins), gold Exchange Traded Funds (ETFs) and gold mutual funds. 

Real Estate offers the security of owning a house, regular income (in the form of rents) and capital appreciation in the long term, although it is advised not to go overboard with real estate due to its illiquid nature. 

Form of investment – residential/commercial property, plot of land or real estate mutual fund schemes.

Hold 15-20% of your portfolio as Cash to meet any sudden emergencies. 

Form of investment - Bank savings account, Bank multi-deposit savings account, Liquid mutual fund schemes and Short-term bond mutual fund schemes.

Note: The above asset allocation for retirees is a general guide and circumstances may vary from individual to individual. It is advisable to take the services of a Certified Financial Planner for customised financial planning. You may do this with Investment Yogi’s Financial Planner.

STEP-4: PLAN AND REDUCE YOUR TAX OUTGO

When you have limited income sources it is important to ensure that the tax outgo from the same is minimal. Therefore, it is recommended to choose your post-retirement investments from the available tax saving products first. For example, if you enjoy the safety and assurance of returns of a bank fixed deposit, you may consider an MIP (Monthly Income Plan) of mutual funds – not only does it offer the safety of a bank FD and stable returns, it is much more tax efficient. Similarly, if you fall into a higher tax bracket (> 20% or more) and have a single source of income, remember to submit Form 15H before 31^st March each year to avoid deduction of TDS on your income.

Another instance is to finance your recurring expenses through investment profits – investing in a ‘post-office Monthly income scheme (MIS) with Recurring deposit (RD) feature’ will help you earn higher yield (interest on interest) on your capital as the monthly income from the MIS is transferred to a recurring deposit account. There is also no TDS deduction for an RD investment.

STEP-5: PLAN AND EXECUTE YOUR WILL

It is advisable to preserve a list of all investments made by you (with account numbers, maturity dates, nominee names, etc.) and also liabilities (credit card numbers, loan account numbers, loans outstanding, etc.), so that transition of your fortune to your loved ones is carried out smoothly.

Plan wisely and juggle the benefits of safety, liquidity, and higher returns the 3 are vital for happy retirement years! 

OTHER SUGGESTIONS FOR THE ELDERLY

i) Avoid loans and excess investment in illiquid assets – Try to avoid loans completely. The maximum leverage you can take in case of a money crunch is to go for a Reverse Mortgage loan. Avail it as a last option. 

To tackle the growing financial insecurity faced by many senior citizens post retirement, Help Age India and National Housing Bank (a housing finance regulator) joined hands with the hope to provide a solution for them through the Reverse Mortgage loan facility.

A reverse mortgage is a loan available to senior citizens (above 60 years of age) who own a house. The house property evaluated for the loan should have at least 15-20 years of residual life. The amount of loan will depend on the market value of the residential property of the senior, his/her age and prevalent interest rates. The maximum loan balance will be restricted up to 90% of the value of the property and loan balance will include interest payable till maturity. Upon the death of the senior citizen(s) availing the loan, the loan is repaid (with the interest accumulated), by selling off the property, or alternatively, through repayment of loan interest by the heirs.

ii) Profits from technology - Most elderly citizens have the habit of traditional banking, i.e., visiting the bank for general banking services (such as cheque book issue, cash withdrawal, pass book updating, etc.). Availing an online banking facility through your bank makes your life so much easier. Nowadays banks are offering almost all services from account enquiry and cheque book issue, to funds transfer, through the comfort of one’s home. Applying for internet/net banking account becomes mandatory.

iii)  Know your rights and benefits – Senior citizens are bestowed with special benefits. Apart from enjoying a higher interest rate on bank term deposits, there are other benefits available.

• Travel concessions – senior citizens can avail travel concessions up to 50% of the fare in case of rail and air travel;
• Higher non-taxable income – the maximum income tax exemption limit for senior citizens (aged > 65 years) is Rs 2.4 lakhs for current financial year 2010-11;
• Take advantage of priority treatment for court case hearings, general banking services, hospital services and telephone services (new connections and service requests by BSNL/MTNL, as directed by Department of Telecommunications).