How to remain ‘unbeaten’ even after retirement

By | April 10, 2015


In cricket, batsmen who have played long innings often go back to the pavilion ‘retired hurt’. Not very different from what most working professionals do when they reach the end of their career – they end up retired and hurt. Financially hurt, that is.

So, why do many Indians face a retirement crisis?

First, India, unlike many other developed countries of the world, does not have a social security scheme in place. Government employees have a pension system in place, which they will receive on retirement. Employee Provident Fund is another retirement tool which is available for both the public and private sector employees.

But, that’s about it. In more cases than not, this is insufficient to take care of life after retirement. And, then what about the bulk of population outside this net?

No prizes for guessing that not saving for retirement can be a disaster. Popularity of nuclear families, high life expectancy, increasing infertility rates and absence of support from the Government makes it absolutely critical to plan well in advance for retirement in India.

Take the case of Rajan and his wife Sharda. Rajan was a private sector employee and retired a couple of years ago. His wife Sharda is a homemaker. The couple have 4 children. All his working life, Rajan has spent his income on the needs of his children and did not save for his retirement. His children are well settled now and are living separately.

Rajan and his wife live in their own house. Rajan has received Rs. 60 lakhs from his Employee Provident Fund and Gratuity and Rs. 10 lakhs from his Public Provident Fund investment.

Apart from this, he owns a house, the present worth being Rs. 80 lakhs. He also has about Rs. 10 lakhs of investment in fixed deposits and equity mutual funds. Despite having an asset base, Rajan realised that in order to sustain his present standard of living, he should make smart use of what he has.

He understood that rather than keeping his investment locked in for the long term, he will need to unlock the value of the investments such that he receives a regular income and at the same time is able to let his assets grow in value.

Rajan can explore the following options to earn a regular income post retirement.

Use retirement proceeds to invest in mutual funds with dividend option: Investing in mutual funds with a dividend option means receiving regular income in the form of dividends. Equity mutual funds are the best form of investment for the long term.

Therefore, Rajan can use his PF and gratuity proceeds to invest in mutual funds. Further, rather than choosing the growth option, he can opt for the dividend scheme, which will give him regular cash inflow. However, this also depends on the risk appetite of the individual.

Invest in fixed deposits with a monthly or quarterly interest payout option: If Rajan’s risk tolerance and risk appetite is low, he can consider investing in fixed deposits rather than equity mutual funds. However, fixed deposits are not the most tax efficient investment avenue.

Nevertheless, as Rajan is looking at regular cash inflow, he can consider fixed deposits with a regular interest pay out option, such as monthly or quarterly payments. This will of course not give him the benefit of compounding, but can help in meeting regular expenses.

Systematic withdrawal from equity mutual funds: Rajan should evaluate the performance of his existing investment in equity mutual funds. If there are better options, or if he wishes to move to safer investment avenues, then he is better off exiting these investments. A systematic withdrawal from the mutual funds will not only give Rajan a regular cash inflow, but will also help in reducing the risk of volatility which is associated with stock markets.

Reverse mortgage scheme: Another method which Rajan can adopt to raise funds post retirement is the reverse mortgage scheme. This is an effective way of getting cash inflows if you own a property. This scheme was introduced by the Government for senior citizens.

Rajan can mortgage his property with a bank, which will value the property and advance a loan to him. The amount can be taken partly as a lump sum and the remaining can be received in the form of annuities.

Rajan can continue to stay in his property with his life. In fact, this is a condition necessary to be fulfilled for reverse mortgage, because if Rajan permanently moves out of the property, the bank can sell the property and recover the loan proceeds.

Retired life is no joke and cannot be taken lightly. Not everyone who doesn’t plan for retirement may even have the assets that Rajan possessed to make use of it smartly. Therefore, start today and invest systematically for your retirement to remain financially secure and unbeaten!

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