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5 strategies to make your funds last

Last updated on: June 06, 2007 09:42 IST

Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money.

-- Jonathan Clements, journalist and author

In retirement, we dream, we will do the things that the daily whirl does not allow us to—read, socialise, travel, play golf, swim.... The list is long. The reality is, in India, most people in retirement barely manage to maintain their lifestyles. Some run drastically low or completely out of cash, lose their financial independence, and lean on their children for their livelihood.

Rajan S Fadnis 61

Retired as senior deputy chief medical officer
With his retirement corpus, Fadnis bought a small piece of land. He has invested the balance equally in debt and equity.
The appreciation from equity investments will help him counter inflation.
"In case of a sudden cash requirement, I will sell off the land."

A big reason why retirement dreams often turn into nightmares is the lack of or insufficient funds to draw on. After all, there has to be enough to create an income stream that can replace the monthly paycheque for two decades or more.

Today, the average urban Indian lives for around 80 years, while he still retires around 58. And many have woken up to this financial reality.

However, even among this set, most have not figured out how to use the funds to take care of their regular as well as lumpy needs as long as they live. Many begin retired life with a healthy nest egg, but squander away that hard-earned advantage through clumsy handling.

So, the other half about achieving post-retirement bliss deals with smart investment of retirement funds. And that is our concern here.

We have worked out five strategies that should help you deploy your retirement funds so that they  outlast you. Apart from the retired, we expect these to be useful to people with retired or about-to-retire parents. But before we get into the strategies, a quick look at the backdrop in which they have to be implemented.

Being Your Own Fund Manager

Unless you have a financial advisor, you have to manage your own funds in retirement. This involves a few things.

Creating income. You have to do it well enough to not only replace your salary income, but also meet lumpy expenses such as house repairs, without overdrawing funds. After all, you have to make the corpus last your lifetime.

Ensuring growth and liquidity. You need liquidity to meet uninsurable expenses, especially those related to health. But you cannot park too much in a low-paying savings bank account. The retirement corpus needs to keep growing so that you have the cash to pop the champagne on your 85th birthday, well beyond the 80 years you were expecting to live.

Managing risks. You will have to protect your funds from a host of risks. The first is investment risk. It can be from falling interest rates on fixed income instruments such as bank FDs, or from a sliding stockmarket via monthly income plans of mutual funds (MF) that have equity exposure.

Then there is mortality risk, or the risk of running out of retirement money. You also face liquidity risk, that is, not having enough cash in hand since your investments are illiquid or don't generate income. Next, there is the risk that inflation will erode the purchasing power of your money. Finally, there is taxation risk, where inappropriate investment options lead to larger-than-desired tax flows that will further dent the corpus.

A L Alagappan 63

Retired PSU bank official
He has invested 5 per cent of his portfolio in equities, and the remaining in bank FDs, post office deposits and PPF.
Since he receives a pension, the equity investment, along with his income from his present job should secure his large corpus.
"I hope to keep working till at least 65 and become a consultant later."

Daunting as it may sound, it is not too hard to make your retirement funds stretch if you are disciplined and alert. The five strategies below should do the job for you.

Keep it big
Reality. Most Indians with a large retirement corpus tend to look only at fixed-income options such as fixed deposits to "secure" both principal and returns. That plan is faulty. Inflation nibbles away at purchasing power, till, in future, income from these deposits cannot meet your cash needs.  

Strategy. Depending on your regular and periodic financial needs, invest a part of the corpus in growth-related investments (like equity MFs) even as you deploy the bulk in fixed-income investments. Pune-based financial planner Veer Sardesai says: "Unless you have an exceptionally large retirement corpus, there is no option but to have some equity exposure."

Investment options. For equity exposure, you can invest in a balanced fund or a diversified equity MF with a good pedigree, size and consistent performance. For example, MF schemes such as HDFC Prudence, SBI Magnum Global and Reliance Growth. In case of fixed income options, consider bank FDs, Senior Citizens' Saving Scheme, Post Office Monthly Income Scheme, annuities of insurance companies, and debt funds of MFs. "Senior citizens continue to maintain a conservative outlook and, hence, the fixed annuities option is what they usually opt for," says N.S. Kannan, executive director, ICICI Prudential Life Insurance.

This equity strategy has found takers already - 63-year-old A.L. Alagappan from Chennai being one of them. He retired as a general manager from a PSU bank and now works for an American bank in Chennai. While 95 per cent of his investments are in fixed-income options, 5 per cent of the portfolio is in equities, a move that should help him beat inflation.

Spread the jam
Reality. Things can go wrong when you invest for retirement or manage retirement funds. For instance, a medical emergency can whittle down your cash stash. This can lead to a shortfall later. So, you must change course and get the funds back up to level.

Strategy. Here too, the answer lies in investing a part of the corpus in equity-related options so that the jam of retirement funds lasts till the end of the sandwich of your life. The answer to how much you should invest depends on your regular income needs and risk-taking ability. Delhi-based B. Subba Rao, 80, a retired media professional, and Mumbai-based Farrouk Irani, 58, an ex-banker who took a voluntary retirement in 2001, are two people who have got their retirement funds back on track this way.

Throughout his work life, Subba Rao swore by and invested in bank FDs and post office savings schemes such as Public Provident Fund and National Savings Certificates. The faith remained till, a few years back, he realised that inflation and declining interest rates on his investments were eroding his corpus. To rebuild it, he started investing in balanced, as well as equity MFs. Today, the last two make up 10 per cent of his portfolio.

Farrouk Irani 58

Retired bank official
He thought that his VRS payment
invested in FDs would be enough to last a lifetime, till low interest rates and inflation hit him.
Today, he has invested 50 per cent of his money in different mutual fund schemes.
"This is the only way I can make my corpus grow."

Irani's story runs similar to Subba Rao's, except that he had a much longer retired life ahead when he saw the erosion. His shift has been sharper. Now, 50 per cent of his funds are in MFs. "This is the only way I can make my corpus grow," he says.

To make this mid-course correction you need to keep reinvesting the surplus cash that you are left with at the end of every month in equity-related products.

Investment options. Ashish Nigam, fund manager, DBS Cholamandalam MF, illustrates the strategy: "If your retirement corpus is Rs 5 lakh, invest about Rs 3 lakh in debt schemes of MFs as they are more tax efficient than bank FDs. Invest Rs 1.5 lakh in equity (diversified and balanced) MFs. The remaining Rs 50,000 should be in short-term and floating rate funds."

If you find it difficult to take this suggestion, remember we are talking about exposing just a part of your portfolio to equity. "Some aggressive senior investors do opt for balanced and equity funds, even though it forms a small portion of their portfolio," says Sandesh Kirkire, CEO, Kotak Mahindra AMC.

Depending on your risk appetite, you can invest at least 20 per cent of your corpus in MFs, especially balanced and diversified funds. "Choose a fund that has done well over the last 3-5 years, and mix of balanced, diversified and equity funds," says A. Balasubramanian, chief investment officer, Birla Sun Life AMC.

When investing in debt, adopt an 'income laddering' strategy. Break up the total amount into smaller pieces and invest them in fixed-income options of different tenures. This creates a regular income stream in the future. Also, spread your investments across other fixed-income options so that this class of investment is diversified and able to withstand interest rate fluctuations better.

Get physical
Reality. You are watching your corpus erode away, but you just can't get yourself to buy equity-related instruments. Or maybe financial assets don't appeal to you and/or you have a large retirement corpus.

Strategy. Consider investing in physical assets such as gold and real estate. These, too, can help you beat inflation and other risks to your retirement funds. "The liquidity issue needs to be considered here," says Sardesai.

M S Kainth 80

Retired government official
To augment his pension, Kainth uses rental income from the first floor of his house that he built during his working years. This, along with the CGHS
facility, has helped him maintain his lifestyle and car, too. "My rental income comprises 20 per cent of my monthly cash flows."

Investment options. With the introduction of gold exchange-traded funds (ETFs), you can get the effect of gold investments in your portfolio.

Mumbai-based Rajan S. Fadnis, 61, has used real estate to effect. He retired as senior deputy chief medical officer at BEST in 2004. Soon afterwards, he bought land outside Mumbai. "If there is a sudden need for cash, I may sell it," he says.

Of the balance, he invested 50 per cent in bank FDs and post office schemes that give him monthly and quarterly returns. Another 30 per cent has gone into MFs and the rest in stocks. That would help him beat inflation comfortably.

Going Ahead in Reverse Gear 

Reverse mortgage can help augment your retirement income 

Your home can generate money for you in retirement and bolster your retirement finances. For that, you need to take recourse to theoption of reverse mortgaging your home. Although reverse mortgage is a well-developed product in the West, it is a fairly new concept in India.

What is reverse mortgage? Reverse mortgage, in effect, worksin the exact opposite direction of the home loan repayment process where repayments are made to the financial organisation every month for the tenure ofthe loan. Once you pledge your house for reverse mortgage with any financial organisation, it estimates its value. Then, taking into account the cost ofcredit, it makes monthly payments to you. The loan is typically settled after you or your spouse is no longer around.

Who offers it? In terms of options there are only two companies that offer reverse mortgage schemes in the country. In August 2006,Dewan Housing Finance became the first organisation to introduce reverse mortgage plan in India with the launch of its plan called Saksham. However, it was a soft launch and the option was available only in Mumbai. Dewan Housing Finance is in the process of launching this product across different schemes aswell. Recently, Punjab National Bank became the first public sector bank tolaunch its reverse mortgage plan called Baghban. The plan is available acrossthe country.

Find alternative income
Reality. Sometimes, to secure your retirement, you can consider looking beyond the strategies that we have proposed so far. Try creating an alternative income stream by taking up part-time jobs or generating income from your house.

Strategy. "People in their early 60s can consider taking up part time jobs in areas such as teaching, consultancy or NGOs," suggests Gaurav Mashruwala, a Mumbai-based financial planner. Fadnis, a doctor by profession, now also works at a diagnostic centre and gets an honorarium. Along with his fixed income investments, the money is enough to cover his regular expenses. Rewards can be higher in post-retirement jobs if you have the skill, experience and inclination to put in the hours as Alagappan's case shows.

You can also make a smart move like Delhi-based Mohinder Singh Kainth, 80, a former government employee, who lives with his wife in his own house. He rents out the first floor of his house and this augments his pension. It also allows him to have a decent lifestyle and maintain a car. "My rental income comprises about 20 per cent of my monthly cash flows," he says. You can use your house to augment your retirement funds by tapping the newly available option of reverse mortgage. "Use reverse mortgage only when other resources dry up and liquidity is a concern," says Brijesh Dalmia, certified financial planner, Mandar Financial Services.

Keeping Wealth Healthy 

Use health covers and emergency funds to counter healthrisks 

Nowhere does the old saying "health is wealth" hold more true than in retirement as healthcare costs can make serious dents to retirement money. At this time, income inflows are static or falling, and illnesses and medical expenses tend to climb. Additionally, in India, the retired have to contend with rising health care costs; they have risen 47-150 per cent since 2001 and are expected to keep rising (See Take the Bite Out of Medical Bills, 31 May 2007).

Limited cover options The best way to cover health care costs is health insurance. However, the extent of coverage can be a problem. Most companies have fixed the maximum entry age at 70 years or less and give coverup to 80 years, provided the plans are renewed religiously. The premiums are high as the likelihood of illness is high. "Since it's a riskier segment, insurers take a cautious approach to cover this age," says Antony Jacob, managing director, Royal Sundaram Alliance Insurance.

A health cover for seniors Varishtha Mediclaim from National Insurance Company is the only policy available to an 80-year-old and is renewable till the age of 90. Other than normal medical insurance, it covers critical illnesses. But the sum assured is fixed at Rs 1 lakh for mediclaim and Rs 2 lakh for critical illness. Under Varishtha Mediclaim, pre-existing diseases are covered after a claims-free year.

Clearly, there is a case for taking health cover early so that you can get a large coverage for lower premium. For instance, if you take a Rs 5 lakh health cover at 25, your annual premium will be Rs 2,800 ,while the same cover would cost you Rs 9,200 at age 58. Plus, there is the danger of more diseases being excluded as pre-existing if you buy the cover late.

Health cover is not enough. Despite having a health cover, costs related to disease-linked disability, diagnosis, diagnostic expenses and physiotherapy will remain uncovered since health and other insurance products don't cover them. To secure yourself you will need to build and maintain an emergency fund. Here's how to do it.

Build an emergency fund Set aside expenses for six months, ensuring that 15 per cent of your net worth is in income generating assets. Invest a part of this money in different tenures of bank fixed deposits. Invest the balance in liquid funds. "Any regular liquid scheme offers better returns compared to bank FDs in the short term and provides nearly the same degree of convenience (liquidity) and safety," says Sandesh Kirkire, CEO, Kotak Mahindra Asset Management Company. If you still can't meet the expenses, liquidate your investments in the order of increasing real returns.

Review regularly
Reality. The need for periodic review of status and performance of your investments is critical in retirement as you depend on the returns. Therefore, a system of periodic review has to be built in to your financial management.

Strategy. "Senior citizens need to periodically reassess their expenses," says Mashruwala. Just in case you have overshot your budget, you need to figure out the reasons. Investment review shouldn't be followed by knee-jerk reactions. "Don't churn the portfolio excessively as it might create unnecessary risks," warns Nigam. How often should you review? While you can set a periodicity for this exercise, some events would necessitate an out-of-turn review. "Whenever there are changes in inflation rates, interest rates and tax regulations, your portfolio is bound to get affected," says Lovaii Navlakhi, managing director and certified financial planner, International Money Matters. It is then that you must review the scene.

American aphorist Mason Cooley wrote: "Retirement requires the invention of a new hedonism, not a return to the hedonism of youth." The five strategies will go a long way in helping you make retirement funds serve you for life and let you invent this new hedonism.

With reports from Sunil Dhawan

Pankaj Anup Toppo and Bridget S Leena, Outlook Money