I am 59 and plan to retire at 62. My annual income is Rs 40 lakh and my office pays for my accommodation, car, driver, phone, electricity and servant. I have other travel expenses of Rs 12 lakh, medical insurance of Rs 39,000, income tax payment of Rs 12 lakh and miscellaneous household expenses of Rs 3 lakh. I have no provident fund, but I deposit Rs 70,000 every year in PPF. My wife is my only financial dependant. I have two apartments that have been let out for Rs 38,000 a month.
I plan to buy a car worth Rs 15 lakh once I retire and will need a driver and servant, besides paying for electricity and maintenance. The annual outgo for these would be Rs 6 lakh. Can you suggest changes to my portfolio to maximise returns and enjoy my retirement.
- Rajesh Lakhotia
| Retirement Corpus | |
| Plan to retire at (years) | 62 |
| Life expectancy (years) | 85 |
| Annual expenses at retirement (Rs) | 19,11,895 |
| Rate of return on accumulation of retirement corpus (%) | 15 |
| Rate of return on distribution of retirement corpus (%) | 10 |
| Inflation (%) | 7.5 |
| Savings Corpus as on date (Rs) | 4,20,00,000 |
| Retirement Corpus (Rs) | 3,45,46,447 |
| Assuming your cost of living will go up by 8 per cent annually and not including the rental income of your two flats | |
Some want to retire comfortably, but do not know what it entails. Very few work towards a perfect retirement. You are one of those few.
It’s common to find people approaching retirement worrying about their savings and whether it will be enough to meet their post-retirement expenses. Yours is one instance where the retirement plans are falling in place. You have saved more than will be necessary for maintaining the post-retirement lifestyle you envisage. You are also well protected against the vagaries of life, with adequate health insurance cover. You have no debts and you have no financial dependents, barring your spouse.
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MISSED OPPORTUNITY
You are seeking to maximise portfolio returns now, when with a little effort you could have done better. Take, for instance, your strategy of investing the Rs 70,000 in PPF and the remaining Rs 30,000 in HDFC Taxsaver to get the most of Section 80C benefits. You would have earned better returns had you invested inversely. In the long run, returns from ELSS are much higher than the eight per cent assured return that PPF offers. Likewise, your bank balance is an unnecessary tax liability. You would be better off with this money in a liquid fund that is more tax-efficient. You should consider moving some of your debt investments into equity for better realisation and a bigger corpus.
| ELSS versus PPF | ||
| Parameter | PPF | ELSS |
| Min. investment (Rs) | 500 | 500 |
| Max. investment (Rs) | 70,000 | 100,000 |
| Tenure (years) | 15 | 3 |
| Returns (per cent) | 8 | Market-linked |
FINAL STRETCH
In retirement, you will have lesser income, which will also reduce your tax liability. However, there will be an increase in your living expenses because you will have to pay for everything out of your savings. You need to cut unnecessary costs to increase the longevity of your retirement corpus.
Consider making a will and setting up an HUF or trust to manage your estate better. Not only will this be tax-efficient, you will also have foresight on how your family will use your estate in future.
RISKS YOU FACE IN RETIREMENT
Recent market volatility has shown how the best-laid plans can get impacted. It’s critical that your retirement portfolio is able to withstand unpredictable market conditions or unexpected changes in your lifestyle. Here are the four key risks you face in retirement. Make sure you are aware of these.
OUTLIVING YOUR RETIREMENT CORPUS
We are living longer as a result of advances in medicine and this could be challenging if you do not have a reliable income stream that will last for up to 20 years or more. Make sure your retirement portfolio generates income for that long.
RISING HEALTHCARE COSTS
Soaring healthcare costs concern everyone. They’re an even bigger threat in the years when health issues are more likely to arise. You must account for this with adequate insurance cover.
REACTING EMOTIONALLY TO SHORT-TERM MARKET EVENTS
Investors are human. Behavioural finance researchers have found that when faced with uncertainty, many respond emotionally and do not always act in their own best interests. This reaction can override thoughtful planning and measured action, compromising our long-term retirement security.
INSURING ASSETS
You may have a house to live, but there could be unfortunate events such as fire or a burglary. Make sure it is well protected and has adequate insurance to take care of any risks to it and its contents.