Right corpus eases retirement pangs


Varadhan, an NRI aged 55 and retiring in 2021, has been working in West Asia for the last 30 years. He wanted to return to India and live comfortably in his home state of Kerala. Prior to retirement, he wanted to find out how much he could spend – rather, the threshold that would ensure a balanced life after retirement. Varadhan’s family includes his mother aged 85 and wife Shyama aged 51.

His assets were as follows:

Requirements

He wanted to set aside ₹12 lakh as emergency fund towards one year expenses with high liquidity and safety. Next, he desired to create a retirement portfolio with minimal risk to get an income of ₹75,000 per month (current cost) from his age 56 till age 90.

Varadhan wanted to set aside funds for his travel needs at an estimated cost of ₹3 lakh a year for 10 years. He also wanted to maintain health corpus of ₹1 crore for all three family members. Besides, he desired to buy a car costing ₹15 lakh. Finally, he wanted to create a will with his wife and daughter as beneficiaries with equal rights (for which we advised him to seek guidance from an advocate).

 

Priority to safety

Based on our discussion, we could understand that Varadhan had limited knowledge of financial instruments, and he had a conservative risk profile and investing mindset. He was a prudent saver and had built his financial assets over a relatively longer period backed by sheer discipline. He was not sure of inflation and its impact on savings over a long period. . Like many aspiring retirees, he also had the need to make a balance between risk and safety a paramount factor. Prima facie, Varadhan wanted to find out whether he could retire immediately or he would have to work till age 60 to add to this corpus and avoid unnecessary risk with his investments.

A challenge in this case would be taxation post retirement. Varadhan had accumulated much of his assets through NRE deposits and the interest was not taxable till date. But post retirement, when he becomes a resident in India, his interest income will be taxable. We helped him understand the taxation associated with deposits and safe investment products.

Recommendations

Based on the above, our set of recommendations were as follows. We advised Varadhan to reserve his NRO fixed deposit towards his emergency fund and car purchase. Hence, he needed to reduce his budget for the car or reduce the emergency fund. Next, we recommended that he create a retirement portfolio using his NRE deposits and mutual funds fully, along with 60 per cent of his gold savings. This will help him get retirement income of ₹75,000 per month from his age 56 till his wife’s life expectancy of 90.

Varadhan needed a corpus of ₹2.8 crore. We advised him to use products such as RBI Taxable bond, RBI Sovereign Gold Bond, large-cap mutual funds and high-quality debt mutual funds. Once he turned 60, he could choose Senior Citizens Savings Scheme and other investment products suitable for regular income. With a corpus of ₹2.8 crore, he needed to generate post-tax return of 6.5 per cent per annum to get the required retirement income. His expected inflation would be 5 per cent in the long run. He may come across periods where inflation could be higher; Varadhan could then use reserve funds to maintain his lifestyle.

His travel requirements (₹30 lakh) could be met with the balance investment in gold. This could be moved to safe avenues periodically to manage the volatility in gold prices. We advised Varadhan to take health insurance for a sum insured of ₹10 lakh each for himself and spouse. Also, the remaining ₹10 lakh from his gold investment could be reserved as part of the health fund immediately.

We recommended that Varadhan sell his land in the next 2-3 years and convert it to financial assets. This will help him manage his health corpus and reserve fund needs. To protect his retirement income from changes in economic assumptions, it is desirable to have ₹80 lakh as reserve fund. This is arrived on the basis of same inflation rate and expected return post-retirement.

Varadhan could retain his rental property and we suggested that rental income, if any, be gifted to his daughter every year. The rental income and maintenance charges for the house were not included in the cash flow calculations.

Every retiree we meet has a fear of outliving the retirement corpus. Safety of capital and inflation adjusted returns form a strange combination. Arriving at the right corpus, which we sometimes call ‘a rubber band corpus for retirement’ is crucial to meeting such expectations. Like how a rubber band has limited elasticity, the corpus should stand the test of inflation and the test of safety of capital. If this is taken care of while working, the desired result could be achieved.

The writer is an investment adviser registered with SEBI, and Co-founder of Chamomile Investment Consultants, Chennai



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