Portfolio

Financial Planning – A plan for a conservative retired couple

Sridevi Ganesh September 15 | Updated on September 15, 2020 Published on September 15, 2020

Understanding interest rate cycles and importance of asset allocation should help

Raghuram, 65, and Vasudha, 62, a retired couple, living in Chennai, had some questions that were troubling them for quite some time. The pandemic and its impact on the economy had worried them. Below are some of their concerns.

— ‘Deposit rates have come down drastically. In such a scenario, should we save only through bank deposits? How safe are bank deposits in these tough times?’

— ‘We were getting monthly rental income of ₹10,000 from our property. In April, the tenant vacated and went back to his native place. We compromised on the rental income amount to get another tenant. If this situation prolongs, how prudent is it to rely on rental income for someone like us?”

— ‘We invested in mutual funds. The corpus value had come down from ₹12 lakh to ₹8.5 lakh. Though this has now recouped to ₹10 lakh, we are concerned with this kind of swing. Should we continue to hold such investments?’

— ‘We have approximately ₹20 lakh worth of gold but do not want to liquidate to provide for our income. Is our thought process correct?’

Below are the assets the couple said they possessed.

Assets

Value (₹)

Self-occupied house

70,00,000

Rental property

40,00,000

Fixed deposits with banks

35,00,000

Senior Citizen Savings Scheme

30,00,000

PM Vaya Vandana Yojana

15,00,000

Mutual funds

10,00,000

Gold – personal assets

20,00,000

Net Worth

2,20,00,000

Their cash flow at the beginning of the planning exercise was as follows.

Annual income

Rental income

84,000

Fixed deposits with banks

1,92,500

Senior Citizen Savings Scheme

2,40,000

PM Vaya Vandana Yojana

1,20,000

Total Income

6,36,500

Annual expenses

Living expenses

2,40,000

Medical expenses

72,000

Reserve expenses

1,20,000

Medical insurance premium

50,000

Total

4,82,000

The queries of Raghuram and Vasudha were quite relevant for someone with limited resources. Their expenses were below moderate. During the initial dialogue, the couple had expressed their nature as ‘conservative’. Hence, their need for setting aside ₹1.2 lakh as reserve kitty was given high priority. The rental income was giving them significant comfort to provide for lifestyle expenses.

Review and recommendations

With the couple’s life expectancy as 85, having ₹70 lakh as the retirement corpus, excluding reserve expenses fund, should be sufficient. This can be through a combination of Senior Citizen Savings Scheme, PM Vaya Vandana Yojana and fixed deposits. The couple’s rental income will provide additional income to support reserve expenses. They need to set aside ₹10 lakh from their fixed deposits as emergency fund/health fund. Their mutual fund investment can be treated as surplus or medical fund and needs to be rebalanced. There is no need to sell the gold as of now; it can be kept as part of the couple’s wealth.

It is common for humans to predict the long term, based on what is experienced in the near term. The couple’s questions were borne out of this tendency to extrapolate the now to the future. Interest rates are cyclical. The couple had forgotten that bank deposit rates were around 5 per cent in the years 2003 and 2004; this then moved close to 10 per cent in the year 2008.

It is during times of low interest rates such as now that one generally starts chasing returns by moving away from bank deposits; the couple were advised not do that. Regarding the safety aspect, we explained to the couple the various options available and explained the various risks associated with the options.

We advised them to think of selling the property at some point in time and move the money to financial instruments that provide stable income without the hassles of maintenance. The excess amount generated out of this sale could be used for drawing additional income if needed at a later point in time. The couple’s mutual funds portfolio was rebalanced to suit their moderate risk profile. They had invested only in equity funds with mid-cap exposure. After explanation and analysis, the couple understood the importance of asset allocation and long-term approach in instruments with equity exposure. While they had no need to draw income from mutual funds for the first 10 years of their retired life, the couple realised the importance of having adequate exposure to appropriate investments to beat inflation over a longer horizon.

This financial planning exercise was a case of preparing the couple for a few bumps in the drive during retirement. The journey would throw a few challenges every now and then, thanks to unknown unknowns and known unknowns. Though there was nothing drastically wrong in their investment choices, they were advised to postpone a few decisions that were reactive in nature, and adopt alternative ideas.

(The writer is an Investment Advisor Registered with SEBI, Co-founder of Chamomile Investment Consultants, Chennai)

Recency bias

It is common for humans to predict the long term, based on what is experienced in the near term

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Published on September 15, 2020
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