I was recently quoted in Economic Times WEALTH (19-25 December 2022) in the Q&A section where a panel of experts answers readers’ questions related to various aspects of their personal finances. This one was about how should a 75-year-old retiree, with Rs 40,000 rental income and Rs 75,000 monthly expenses, manage to deploy his Rs 75 lakh retirement corpus.
The exact question is given below –
Here is the article page where the query is answered:
Here is the text version of the query and the reply –
Q – I am 75 years old with a total kitty of Rs 75 lakh. My wife is a homemaker and is 68 years old. We do not have any dependents. I own 2 houses and derive an income of Rs 40,000 pm from one of them. Our portfolio consists of Rs 12 lakh in bank FDs, Rs 21.5 lakh in SCSS, Rs 30 lakh in PMVVY, Rs 3.5 lakh in Annuity giving Rs 36,000 per annum. Rest of the amount is in Nifty Index fund and Aggressive hybrid funds with market value of Rs 4 lakh each. Our current monthly expenses are Rs 75,000 pm. Considering our age how can I reconstruct my portfolio to preserve capital considering a life expectancy of 90 years? I was paying a premium of Rs 40,000 each year for medical cover of Rs 2 lakh for each of us . As I considered that too high, I discontinued my medical insurance and earmarked Rs 10 lakh in FDs for medical emergencies.
A – Your current monthly expenses are Rs 75,000 and your rentals from 2nd property provide Rs 40,000 of it. That leaves Rs 35,000 per month or Rs 4.2 lakh per annum that needs to be generated by your retirement corpus of Rs 75 lakh.
At present, the combined amount of Rs 51.5 lakh parked in SCSS + PMVVY would be generating close to Rs 3.75-4 lakh per annum, which seems sufficient to complement the rental income and provide for regular monthly expenses.
The maturity timelines of both SCSS and PMVVY are not known but as and when they are complete, it might be a good idea to reinvest in SCSS, PMVVY (if still available), Floating Rate Bonds, debt funds, etc. I wouldn’t suggest locking in a large part of your corpus in annuity at present.
As you rightly said that given your age the primary idea is to ensure capital preservation and ensuring that the corpus supports living expenses (after accounting for future inflation) till at least 90. And the current financial asset base of Rs 75 lakh (not considering physical real estate) and asset allocation of 11% equity seems reasonable enough for the time being.
The choice of index and aggressive hybrid fund for equity allocation is good enough and needs no change for the time being though having only one index fund is also sufficient.
This may not sound nice to everyone but please do give some thought to how you will operationally manage the rental property in future years and what is its current rental yield (not known due to lack of information about property value). If the rental yield is low (than say less than even bank FDs) and you also don’t want to be involved with tenants and property-related headaches in future, consider liquidating the rental property and using the money to invest in financial assets. At that point, one can further increase equity allocation as well as bringing in some more annuity to provide a floor to monthly income. Please do check with a CA for tax impact of this decision due to possibility of capital gains being taxed even after indexation benefits.
The FD of Rs 12 lakh is rightly kept aside as an emergency fund, medical contingency fund and as an ongoing liquidity reserve. While renewing, please divide the FDs into several smaller FDs so that you don’t have to break one large FD when your requirements are smaller.
Given your age it would be difficult as well as mathematically ‘not-so-prudent’ decision to pay very high premiums for very small health insurance cover. So your FDs should serve you well in this. Many PSU banks also have tie-ups with health insurers to provide group health coverage to account holders at very cheap premiums which are same for everyone irrespective of their age. So you can check that as well. Also, please consider getting enrolled in government provided health coverage for just-in-case scenarios.
You can read my previous responses in Economic Times Ask The Expert section using the below links:
- ET Wealth – Nov 2022 – (link)
- ET Wealth – Oct 2022 – (link)
- ET Wealth – July 2022 – 2nd (link)
- ET Wealth – July 2022 (link)
- ET Wealth – June 2022 – 2nd (link)
- ET Wealth – June 2022 – (link)
- ET Wealth – April 2022 – 2nd (link)
- ET Wealth – April 2022 – (link)
- ET Wealth – March 2022 – 2nd – (link)
- ET Wealth – March 2022 – (link)
- ET Wealth – February 2022 – 2nd (link)
- ET Wealth – February 2022 (link)
- ET Wealth – January 2022 (link)
- ET Wealth – December 2021 (1st) (link)
- ET Wealth – December 2021 (2nd) (link)
- ET Wealth – August 2021 (link)
- ET Wealth – July 2021 (link)
- ET Wealth – June 2021 (link)
- ET Wealth – March 2021 (link)
- ET Wealth – November 2020 (link)