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

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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

 

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, 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 topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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7 Comments

  1. Best advice-put it in a bank.Dont play on your parents retirement benefit.Put it in an FD and be safe.Most professionals learn using your money-they are not Gods to predict. Unless you are a pro at stock markets.Want to invest?-use your money

  2. many times i read that equity investment should be ( 100-your current age) for simple people like us in that case if the person is 58 years age is going to retire after 2 years in that case the must have at less 30-40 % equity MF 16lck ( if it is 40%) and 12lck ( if it is 30%).
    8lack in icic liquid fund for emergency fund.
    for rest if the want monthly cash flow PMVVY IS GOOD OPTION. ACCORDING TO THERE REQUIREMENT OF CASH NEED THE CAN OUT MONEY THERE FROM 1LAC TO 15LAC. REST IN FD OR IN ANY POST SCHEME.OR DEBIT FUND. THIS WILL MAKE US MORE COMFORTABLE ITS SIMPLE. ( NOT THE EQUITY PART)THE HAVE PENSION TOO FOR THERE MONTHLY EXPENSES. RENT ALSO.
    BUT THE MOST IMPORTANT THING THE MUST DO IS MAKING PLAN HOW THE WANT TO SHIFT THERE PROPERTY TO NEXT GENERATION. BECAUSE MANY CASES ONE SINGLE OLD PERSON SUFFER. SO IT IS BETTER THE THINK ON IT MORE SERIOUSLY NOW AS THE ARE YOUNG 58 ( NOT 70-80 YEAR OLD I MEAN) . IF YOU WANT TO GO FOR YOUR PARENTS CHOICE OR WANT TO MAKE THEM HAPPY JUST BUY A PROPERTY. LOOK AT THE JOY ON THERE FACE. NOTHING WILL GIVE THEM THIS JOY NO MF NO PMVVY NOT ANYTHING. THE WILL BE READY IF SUGGEST THEM A PROPERTY THE CAN UNDERSTAND IT PUT SOME MONEY IN FD .
    IM TELLING YOU THE BOTH END ONES MAKE PARENTS HAPPY OTHER MAKE MONEY HAPPY. LOL

  3. Is it necessary to buy annuity if the parents are receiving indexed pension from State government ? And also considering the point the monthly expense is less than the income or pension received.

  4. From my experience, I strongly advise children don’t manage, but must know when to step in, especially in nuclear families where children are far away from the parents.With better longevity, a stage could come when parents signature changes, mental confusion and apathy sets in with dementia. Sometimes, the progression of these diseases is slow, unpredictable and may be years that a parent will have to live with it. Therefore, it is very important to notice these changes and do something about it in time. A power of attorney is very advisable in addition to a will just in case a property or some assets has to be sold to consolidate the family and bring everybody together. Ofcourse nothing beats a loving and trusting family support.

  5. I am also in similar situation. What I have decided is as follows:
    I will be getting Rs 40 lakhs on my retirement. My allocation will be as follows:
    Rs 5.00 lakhs will be emergency fund. It will be kept in Bank FD opting quarterly interest payment.
    Rs. 15 lakhs will be kept in SCSS, opting quarterly interest payment.
    80-60=20 will be in equity.
    Rs. 8 lakhs will be in Franklin India Equity Hybrid Fund-DirectPlan
    Remaining 40-20-2=18 will be in PPAF.
    On both these two MF, I will have a SWP of 0.67% units every month. That will make it 8% annually.
    I will be getting Rs 35000/- pension.
    I believe the MFs will take care of inflation part. Long term will be adequate to take care equity risks. Earlier, I was interested in debt funds. But now a days one or the other reputed corporate going bust almost daily. A debt fund which will not deal in Corporate debts is giving return less than Bank FD. When inevitably I have to take risk why not aim at higher return.
    Pension and quarterly interest+ SWP will not be exhausted entirely in a month. So the left amount will be invested again in Franklin India Equity Hybrid Fund and SWP as above will be set. BTW I have medical insurance, and I will have an RD maturity coinciding with insurance premium of this medical insurance policy.

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