With rising inflation, mutual funds score over post office senior citizen saving scheme (POSS) and fixed deposits for investments in a retirement plan
In India, social security support on retirement funding or provision of pension is very limited or non-existential. The government supports senior citizens by providing additional facilities, rebates and exemptions. But beyond that, senior citizens have to manage their expenses. Here are some of the challenges:
The corpus requirement should be planned and accumulated during the pre-retirement phase. On retirement, one of the important decisions is investment of the retirement proceeds. In case you don’t get a pension, the primary objective of this investment should be to generate cash flow to support regular monthly income for years and fund specific goals such as children’s higher education, marriage and vacation. When selecting an investment or saving product, you should consider monthly or quarterly expenses, after factoring in inflation. You must extend the corpus for longest possible time, taking the increase in life expectancy of retiree and spouse, specific goal corpus requirement, tax efficiency of the instrument and liquidity of the product into account.
Traditionally, senior citizens invest in annuity plans of insurance, post office senior citizen saving scheme (POSS), bank fixed deposits and tax-free bonds. With rising inflation, supporting household expenses with traditional instruments such as POSS or bank FDs may become tough. Mutual funds offer a good investment opportunity.
Investment of retirement corpus can be planned in three steps:
Step 1: You should have three to four years of household expense invested in liquid mutual funds. You can do a monthly or quarterly systematic withdrawal plan (SWP) to replicate the income requirement.
Step 2: Based on the risk profile and other goal requirements, invest the remaining corpus in a combination ofdebt and equity mutual funds. This asset allocation strategy should be scientific and not a random percentage.
Step 3: You should continuously monitor, review and rebalance your investments.
In India, the biggest financial challenge for citizens is the cost of hospitalization and ever-increasing medical expenses, more so for senior citizens who are prone to age-related health issues. The best way to address it is by getting proper health insurance cover and subscribing to health cards. A good health insurance will cover any hospitalization expenses. On the other hand, newage products such as health cards give access to free OPD consultation, discount on medicines, home nursing and diagnostic services. Our research shows that 97% of middle-class families completely exhaust their savings in case of medical emergency. A health insurance cover will prevent such a scenario.
If you own one or more assets, you can sell it to fund your retirement. You can also give it on rent. If you own only one property, you can opt for a reverse mortgage product. In reverse mortgage, a senior citizen gets a regular stream of income from a lender (a bank or a financial institution) against the mortgage of home. The borrower can continue to live in the property until his death.
It is important to secure your assets and ensure they are transferred according to your will. This can be done by writing a proper will as part of succession planning. The assets you leave behind can hold both financial and sentimental value, and you may want specific items to be inherited by a certain family member or relative.
Legal complexities arise when a person dies without a will. The challenges not only cost the family financially, but also emotionally. It is advisable to approach professional and qualified financial planner to plan for retirement.
Nitin Vyakaranam is founder and CEO, ArthaYantra Corp. Pvt. Ltd.