Financial Planning . For a comfortable retired life

Madhavan, 65, and his wife Janaki, 62, wanted to check if they had accumulated sufficient funds for their retirement.

Madhavan had retired at the age of 60, and had accumulated a corpus of around ₹3 crore. After retirement, he took part-time employment to keep himself occupied. His expenses were going up every year and he wanted to understand how to manage his funds so that his needs are met with minimal risk to his capital.

High expenses

His quoted expenses were ₹8.5 lakh per annum. It was too high compared with his financial investments and other assets. He was right in worrying, as he was at the risk of running out of his corpus before his expected lifespan, if he did not manage his expenses efficiently.

Janaki has been maintaining the family expenses all through the years since Madhavan’s retirement. When we analysed the expenses in detail, we could figure out the reason for his worry. Their monthly and annual expenses are listed in the table.

Madhavan pockets around ₹16.89 lakh as interest income from various fixed-income investments. In addition, he gets around ₹3 lakh per annum from the part-time employment. But the biggest hole in the bag was his tax outflow. We advised him to use liquid mutual funds and other tax-saving options to reduce his tax outflow.

Madhavan needed a retirement corpus of ₹2.28 crore to maintain his annual expenses of ₹5.56 lakh (excluding charity and travel). We advised him to draw only ₹6 lakh from his retirement fund adjusted for inflation every year.

His financial assets were sufficient to manage his retirement expenses, though some minor adjustments such as allocation to liquid funds were required to generate tax-efficient returns.

Separate portfolios

We advised Madhavan to draw his travel plans and charity goals separately. Also, we suggested that he and his wifemoderate the vacation spend to either ₹1 lakh in one vacation every year for the next 10 years or ₹2 lakh per vacation every alternate year for the next 10 years. The maturity values expected out of life insurance policies would be sufficient to manage these expenses.

Madhavan’s charity goal can be funded as long as he continued his part-time employment; also, any surplus after factoring in travel expenses could be used for charity. Defining a fixed contribution to charity was not feasible and he understood that. This kind of bucketing of his expenses helped him reduce the risks associated with his investment plan and improve tax efficiency.

Wealth for health

His financial plan also had another major drawback. He was not giving adequate importance to providing for his health-related expenses other than having a health insurance policy. We advised him to opt for another top-up health insurance policy for a sum assured of ₹10 lakh. We also recommended that he convert his land to a financial asset at some point of time so that the proceeds can be reserved for his health fund.

He wanted to explore equity mutual funds through equity-linked savings schemes (ELSS) that have a tax-saving advantage.

This, he felt would help him generate inflation-adjusted returns in the long run. We agreed, as ELSS can be a good way for senior citizens to to take some equity exposure over the years.

As Madhavan and Janaki have a family history of long-living parents and relatives, we advised them to draw the retirement plan with a life expectancy of 100 years for both of them. Underestimating life expectancy and health-related expenses could jeopardise their long-term retirement plan.

Not an easy task

Adding tax-deferred instruments, investing to get inflation-adjusted returns over the years and generating additional income as long as possible will help lead a financially secured life in the long run. Retirement planning is not an easy task as it needs to accommodate changes in lifestyle, health and other risk factors that are not known currently.

Understanding risks, setting up adequate provisioning to absorb shocks arising out of unforeseen risks and avoiding a few risks are vital to a secured life backed by proper planning.

The writer is a SEBI-registered investment advisor at Chamomile Investment Consultants

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