My father will be retiring with 40 lakhs how should he invest?

Published: November 11, 2018 at 11:26 am

More and more young earners are asking questions such as “My father will be retiring with 40 lakhs how should he invest?” Let us discuss strategies of retirement planning for senior citizens. Here is how your parents can invest their nest egg after retirement. As an example, I consider a question asked by a reader who prefers to be anonymous.

Before we begin, did you miss the last few posts? Catch up now:

HDFC Mid-Cap Opportunities Fund – Performance Review (video version is linked at the end of the post)

Stock Portfolio Update November 2018 (Lazy Investing)

If you are asking this question on behalf of your parents, then I have a question for you: Should we be managing our parent’s retirement corpus?. I think we should not unless they specifically ask us to. DO NOT assume that just because you understand inflation and invest in equity makes you financially literate! If your parents want your help, then refer them to my List of Fee-only Financial Planners in India. You can get commission-free, conflict of interest-free, holistic financial advice at low cost. I am proud that hundreds of freefincal readers are working with them.


Even if your parents do not want your help, pointing to a fee-only financial planner is the second best-unsolicited advice that one can provide What is the first? Do not enter a bank unless absolutely necessary! If they have to go to a bank, ask them to say NO to whatever the relationship manager recommends.

Retirement planning for senior citizens: Example

Retirement planning for senior citizens

The question posed by the reader: My father is going to retire in 2 years. He is PSU Bank employee. He doesn’t have any planning for retirement. The retiral benefits he has is a monthly pension of 35-40k/pm. And a corpus of 40 lakhs. He has a medical cover of 10 lacs for himself and for the spouse. He will be living in a tier – 2 city and has a house with a rental income of 6k/pm. Do you have any suggestions for retirement planning?

At first sight,  this looks like a comfortable situation, but we need to dig deeper. My suggestion to the reader was, that the father should seek help from my list of fee-only financial planners (all of whom are registered with SEBI as investment advisors.). They also get regularly featured in the media. See, for example, Swapnil Kendhe’s client story in mint. Swapnil can be contacted via his website Vivektaru

This post is only an illustration of the factors to be considered while taking up retirement planning for senior citizens. The actual recommendations made here may not apply to anyone in particular.

First of all, let us stop and appreciate the question. Notice that it provides so much information. Some people actually ask only the question in the title and not provide any more details!!

Before we start, let me also mention that the freefincal robo advisory software template allows a detailed planning of retirement. It will also tell you when you can afford to invest your nest egg and when you should simply play it safe and buy an annuity.

Key Factors to consider while planning for retirement

  1. What is the total monthly income?
  2. What is the total monthly expense?
  3. What are the one-time or annual expenses?
  4. Do they have an emergency fund?
  5. What is the age of the younger spouse? This will decide for how long the plan has to be made.
  6. Do they have any health insurance?

There are other questions like,

  • do they wish to travel?
  • do they have any financial goals?
  • do  they wish to leave some money for their children or grandchildren etc

They can however wait. Let us only consider the key questions in the post for example 1.

  1. total monthly income (post-tax) ~ 37k (pension + monthly rent). Do not worry about 80C benefits! There are bigger problems to consider. We will assume that the monthly income will remain constant in retirement. However, be warned that the rental income can stop at any time with a break of months in between.
  2. We will assume that the total monthly expense initially is the same the monthly income. If there is any small excess left each month, that can be pushed into a flexo-deposit bank account (hopefully with senior citizen interest rates).
  3. The above excess sum can be used for paying annual expenses like health insurance premium.
  4. The emergency fund should be at least 12-15 times the monthly income and put in an FD.
  5. The health insurance of 10L is a life-saver here. Else no matter what the cost, it is important to get one for them (better that you = son/daughter, pay for it)

Now comes the tricky part. If we assume a nominal 6% inflation, the monthly expenses (based on current values) will last only for about 5 years in retirement (probably a bit less!).

Suppose the 40 lakh is invested in a portfolio giving 8% after tax (this is optimistic depending on the risk experience of the father) and each time there is an expected shortfall in the monthly income, a small portion from the investment can be moved to FDs or small saving schemes for getting additional income.

Even if this done, it will only be able to keep pace with inflation for about 10-12 years into retirement. So I would list the following as options:

1: Invest the 40 lakh in a portfolio of about 30-40% equity (dynamic asset allocation funds like ICICI Prudential Balanced Advantage Fund: Performance With Low Volatility can be used (growth option, direct plan only) and rest in fixed income for at least 10 years. During this period, the children can take care of the parents (by arrangement). After 10 years, the parents may have reached close to 70. At least a portion of the investment can be used to buy an annuity plan at a good interest rate (it becomes better with age)

2. Parents may not like the arrangement or the exposure to equity. In such a case, it is better to let them invest the 40 lakh in a small saving scheme (eg the senior citizen saving scheme). The children must keep an eye and help out when they the need money. Better for the children to write a proper will and allocate money for the parents, just in case.

This is the key issue when it comes to retirement planning for senior citizens. Many of them cannot handle volatility. They are unused to it. So even a professional has to be careful.

Even the extreme step of buying an annuity (pension plan) right upon retirement with the full 40 lakh will not keep pace with inflation beyond 10 years. Of course, one could argue that 6% inflation is too much for a senior citizen (their life is over no? They should not be spending on anything extra). but that is no way to plan. We must keep in mind that the 6% every year is  a proxy to safeguard from the perils of unexpected recurring expenses

In summary, this case is typical of most of the present parents’ generation. My parents had much less to work with! This is the classic catch-22 retirement planning problem. Buy a pension plan and you will not keep pace with inflation from day one. Take on some risk and either it will hurt the corpus or will anyway still not beat inflation after a few years.

The most important lesson from this example should be: have a good relationship with your children! They will have to bail you out if necessary. For the specific case discussed here, option 1 – investing the corpus for 10 years (hopefully untouched) and then buying an annuity seems like a good option IMO. At least for ten years, the parents will have liquidity. Remember buying a pension plan asap will lock up money for life.

Download this free e-book: Post-retirement income generation strategies

Got a better solution? Share in the comment section below.

I will not take random suggestions seriously, you will have to validate them. Have a good weekend. Chennai makkal, let us pray for some rain this week!

Here is the video version of HDFC Midcap Opportunities Fund Review

 

Do share if you found this useful

We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps