While there are a range of investment options for investors who have long-term investment objectives, admittedly investors with immediate needs have a limited number of investment avenues. Retired individuals looking to generate a monthly income fall in the second category.
At Personalfn we came across a retired couple who wanted to generate a monthly income post-retirement and needed our assistance in achieving this objective.
Facts of the case
The client, Mr. Shah (name changed to protect the client's identity), is retired and wanted to generate monthly income to sustain his wife and himself.
Mr. Shah's children are settled and the parents want to plan their finances independently.
The client had a corpus of Rs 4,000,000 (Rs 40 lakhs) from which he had to provide all his future expenditure.
Rs 300,000 was set aside to provide for emergencies, in effect his retirement corpus stood revised at Rs 3.7 m
Details of expenditure
The monthly expenditure of the couple amounted to Rs 20,000.
The couple wanted to set aside Rs 50,000 for their annual travel plans.
Not enough...
When we did the 'numbers' for Mr. Shah, we discovered that for him to successfully meet all his post-retirement commitments (monthly expenditure, travel plans) he would need a retirement corpus in excess of Rs 4.8 m. Compared to the retirement corpus he had then i.e. Rs 3.7 m ( Rs 4 m less Rs 0.3 m for the emergency fund), Mr. Shah was at least Rs 1.1 m shy of achieving his retirement plan.
Two options for Mr. Shah
As we saw it, Mr. Shah had two options in front of him. He could either decide to continue with his existing retirement plan without any changes or he could make some adjustments and cut down expenditure so as to have better chance of realising his post-retirement plans (monthly income and travel plans). If Mr. Shah decided to opt for the first option (status quo) he would have to take on a lot more risk to meet his retirement plans. Taking on higher risk could jeopardise Mr. Shah's retirement plans if the investments did not work out as planned. Moreover, he did not have the requisite time frame (since his need for post-retirement income was immediate) for making high risk investments like stocks which perform well over the long-term (at least 3-5 years).
The more prudent option staring at Mr. Shah was to make adjustments to his retirement plans so that he could achieve a large part of his dream retirement (if not everything).
Re-evaluation of the retirement plan
Mr. Shah re-evaluated his retirement plan and decided to shave off some of the needless expenditure from his monthly expenses and cut down on his annual travel plans.
He revised his monthly expenses lower to Rs 15,000 (previously Rs 20,000).
He trimmed his annual travel expenditure down to Rs 35,000 (previously Rs 50,000).
Mission achievable
Suddenly Mr. Shah's retirement plans were within reach, all because he was flexible (and prudent) enough to make the necessary adjustments to his plans. With the changes, it was possible for him to lead his retirement life on his own terms without taking on more risk and losing out in the process.
We set about preparing a financial plan for Mr. Shah with the revised investment details.
Avenues for investment
We have assumed an 8% post-tax return on Mr. Shah's retirement corpus. In our view, this is not very difficult to achieve given that a) Mr. Shah does not have any other income and b) he qualifies for the higher threshold limit of exemption for income tax. Also we gave the highest weightages to avenues, which had an element of assured income since generating a monthly income was Mr. Shah's primary objective. Avenues like FMPs and MIPs (which do not assure income) could be used to generate monies for travel, which was the secondary objective.
| Age (at present) | Yrs | 60 |
| Retirement planned at age | Yrs | 60 |
| Life expectancy | Yrs | 80 |
| Current monthly expenditure | Rs | 15,000 |
| Annual expenditure | Rs | 180,000 |
| Provision for travel, healthcare (annual expenditure) | Rs | 35,000 |
| Annual expenditure at retirement | Rs | 215,000 |
| Post-retirement inflation | % | 6.0 |
| Post-retirement life expectancy | Yrs | 20 |
| Expected return post retirement | % | 8.0 |
| Present value of all post retirement expenses | Rs | 3,621,331 |
Mr. Shah needed to have an investment portfolio designed specifically to help him generate the requisite post-retirement income. We short-listed the following as the likeliest investment avenues for Mr. Shah given his objectives:
Senior Citizens Savings Scheme - This scheme gives a 9% (taxable) return, which is paid out quarterly.
The Post-Office Monthly Income Scheme (POMIS) - This scheme gives an 8% (taxable) return, which is paid monthly.
Fixed Deposits (FDs) - While the rate on FDs varies depending on the debt market conditions among other factors, if invested at the right time (based on the interest rate cycle), even a AAA rated FD can offer a very competitive return (taxable). Most FDs have a quarterly interest payout option.
Fixed Maturity Plans (FMPs) - Like FDs, the yield on FMPs varies depending on the debt market conditions among other factors. And again, if invested at the right time (based on the interest rate cycle), an FMP can offer a very competitive return (again, taxable). The dividend or growth option can be selected depending on the investor's needs, although for an investment time frame exceeding 365 days the growth option is more tax efficient.
Monthly Income Plans (MIPs) - For older investors who can take on a little risk investing in MIPs that invest about 10%-15% of their assets in equities is an option. Investors should avoid opting for the monthly dividend option (although the name misleads one into believing otherwise) and select the quarterly dividend option. The return (taxable) on MIPs is dictated by stock and debt markets; nonetheless MIPs are well placed to outperform conventional debt investments over the long-term. .
In conclusion...
At the end, investors will appreciate that what we recommended to Mr. Shah was only a probable retirement plan. Even if it applies accurately to Mr. Shah, it cannot be replicated by other investors. Every investor will have to independently determine his own facts of the case carefully after taking his financial planner in close confidence. Only then must he embark on his investment plan.
| Expected Return | Suggested Allocation | Weighted Return | |
| Senior Citizens Savings Scheme | 9.0% | 30.0% | 2.7% |
| POMIS | 8.0% | 30.0% | 2.4% |
| FDs | 9.0% | 15.0% | 1.4% |
| FMPs | 9.0% | 10.0% | 0.9% |
| MIPs | 9.0% | 15.0% | 1.4% |
| Weighted average return | 8.7% |
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