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Find out the investment strategies that can ensure a comfortable retirement by optimizing returns and generating a regular income.

You worked hard, saved regularly and invested intelligently to build a sizeable nest egg. So when you finally retire, one would think it is time to relax and enjoy the fruits of your labour. But don’t take your foot off the pedal just yet. You still need to do one crucial task: deploy your retirement corpus in a way it can sustain your expenses for the rest of your life.

At 60, the average Indian can expect to live up to 78. In urban areas, the average lifespan is even longer. By the time one is 70, the average life expectancy goes up to 82 years. This also means retirees have to plan their finances in a way that they don’t run out of money in their old age. The problem is that their income is completely dependent on the returns generated by their investments. At the same time, they have to be ready for contingencies and avoid taking undue risks with their money. This week’s cover story focuses on smart strategies that can ensure a comfortable retirement. These eight steps can help a retiree live out his golden years in financial bliss.

HAVE WITHDRAWAL PLAN

For retirees, especially those who are not living with their children, the most important need is a regular source of income to sustain their living expenses. This is not as simple as it may sound, because, thanks to inflation, the cost of living keeps rising. If a retiree needs `40,000 a month for his living expenses in 2015, even a nominal inflation of 6% will push this figure up to `42,400 a month if he wants to maintain the same lifestyle in 2016.

To ensure that you don’t run out of money in old age, you must figure out how much you should withdraw from your retirement corpus. If your retirement corpus is earning a return of 8%, then it can sustain inflation-adjusted withdrawals of 6% a year (or `500 a month per `1 lakh) for 21 years and four months (see table). But a higher withdrawal of 7% a year will deplete the corpus in less than 18 years. If you are withdrawing 9% every year, the corpus will be wiped out in less than 14 years. Here we have assumed a super-conservative inflation rate of 6%, though some major expenses such as healthcare are rising at a much faster clip.

Higher withdrawals can be sustained if you allocate some portion of the corpus to equities to earn a higher return. Even a 10-15% allocation to equities can push up the overall return of the portfolio by 100-150 basis points. The MIP funds from mutual fund houses, which invest only 10-20% in equities have given average returns of 9.4% in the past 10 years. The best performing MIP fund has given 13.5%. In the table, we have assumed 9.5% returns for such an allocation.

CHOOSE MIX OF OPTIONS

Many retirees have sources of regular income. They earn pension from their employer, receive annuity income or earn rent from property. If you have none of these, you will have to structure your investments in a way to give you regular income. The Senior Citizen’s Saving Scheme is a good option for those looking for regular income. The scheme offers 9.3% assured returns and in vestments are eligible for tax deduction under Section 80C. There are only two glitches: the income is fully taxable and there is an investment limit of `15 lakh per individual.

You can get regular income from your bank deposits as well. Unlike the Senior Citizen’s Saving Scheme, there is no limit on investments in bank deposits. Deposit rates have come down in recent months but still remain attractive. You can consider investing in long-term fixed deposits on 7-10 years. The RBI has also allowed banks to offer differential rates for long-term deposits of over `15 lakh (see box).

But the income from fixed deposits is fully taxable at the marginal tax rate applicable to the investor. Those earning more than `25,000 a month (`3 lakh a year) will have to pay tax. If you are in the high tax bracket, you can go for debt funds to avoid the 30% tax on your retirement income. The income from debt fund investments is treated as capital gains. If you withdraw before three years, the short-term capital gains get the same treatment as interest income. But after three years, they are treated as long-term capital gains and taxed at 20% after indexation. Indexation takes into account the inflation during the holding period and reduces the tax accordingly. It can sometimes reduce the tax to almost nil.

Invest the amount in a short-term debt fund and start a systematic withdrawal plan (SWP). An SWP is the opposite of an SIP and gives a monthly income to the investor. Mutual funds also allow investors the flexibility to increase their withdrawals in line with the rise in the cost of living. You can alter the SWP amount to suit your needs.

DON’T SHY FROM EQUITIES

It is widely believed that one should gradually reduce the exposure to high-risk equity investments as one approaches retirement. This makes sense because your wealth is protected from volatility that is inherent to equities. But this should not mean that you completely avoid equities and put all your eggs in the fixed income basket. Fixed deposits may appear a safe option but they won’t be able to prevent the eroding effect of inflation on your savings. “Your money needs to grow at a faster clip than the inflation rate to sustain your lifestyle for several years. This can’t be done by parking the entire retirement savings in low yield fixed deposits,“ says Hemant Rustagi, CEO, Wiseinvest Advisors.

Here’s how inflation can hurt retirees. If you spend `40,000 a month on household expenses today, even 6% inflation will push that up to `72,000 a month by 2025. By 2030, you will need `96,000 every month. By 2035, it would be `1.28 lakh a month. Stocks are the only asset class that has the potential to beat inflation on a sustained basis. You need to harness this power even after you have retired. “Building your corpus need not end at retirement as you still have another 20-25 years to live,“ says Vidya Bala, Head of Research, Fundsindia. Experts say a retiree must have at least 10% and at most 20% of his retirement corpus in stocks.

Of course, this exposure to equities should not be done directly in stocks but through mutual funds. Mutual funds diversify the risk by investing across a basket of stocks. Mumbai-based Rajendra Upadhyay (see picture) has some `10 lakh in stocks. Our advice to him is to reduce the risk of holding individual shares by shifting this money into a diversified equity scheme. Balanced schemes that invest in a mix of debt and equities and large cap diversified equity funds are the best bets for retirees because they are less volatile and offer relatively stable returns. Avoid smallcap, mid-cap and sectoral funds even though these categories have churned out spectacular returns in the past 1-2 years.

If you have no stocks exposure and plan to invest some part of your retirement benefits in equity funds, don’t invest lump sum. Instead, put the amount in a debt fund and start a systematic transfer plan (STP) into the chosen equity fund of the same fund house.Under a STP, a fixed amount is shifted from the debt fund to the equity scheme every month. This way you benefit from rupee cost averaging.

HEALTH COVER IS CRITICAL

As mentioned earlier, healthcare expenses form a bulk of the total cost in retirement. An ageing body requires frequent medical attention, implying a rising medical bill. Healthcare inflation in India is galloping at 15-20% and medical expenses can wipe out your savings in no time. Since you are no longer employed and won’t have group health cover to fall back on, health insurance is critical for you and your spouse. Although buying a fresh cover at this age won’t be cheap (see graphic), it is absolutely necessary to buy one. In an emergency, good and timely medical care can sometimes mean the difference between life and death. “The premium will depend on your health condition. Pre-existing illnesses will drive up the premium and will be covered only after a moratorium period. You may not even get a cover in case of severe ailments,“ says Suresh Sadagopan, Founder, Ladder 7 Financial Services.

If you already have a health cover, but for a lower amount, ask your insurer for a top-up to the existing cover. This add-on cover comes into play only after a certain threshold limit, also known as deductible, is reached. Suppose you have a basic health policy of `3 lakh. You can opt for a top-up cover of `5 lakh with a deductible, or threshold, of `3 lakh. In this case, if your hospital bill comes to say, `6 lakh, the base policy will cover medical expenses up to `3 lakh and the top-up plan will kick in thereafter. This top-up extra cover is far cheaper than a fullfledged policy.

The good part is that you get a tax deduction when you buy health insurance. The premium is eligible for deduction under Section 80D. From this year, the government has provided for enhanced deduction to senior citizens of up to `30,000 a year.

AVOID BUYING ANNUITIES

One way to ensure lifelong income is to invest in an annuity. While this does away with

the risk of running out of money (the pension is given out till death), the annuity is not a great option. The returns offered by these plans are dismal, to say the least. “At a time when banks are offering 9.5% on fixed deposits to senior citizens, annuities offer less than 8%. These products are also highly taxinefficient,“ warns Neeraj Chauhan, CEO, Financial Mall. Worse, the income from an annuity is fully taxable. So the post-tax money you invest in an annuity plan is given back to you as fully taxable income.

Besides, annuity investors have to consider the impact of the 3.09% service tax. If you invest `10 lakh in an annuity, `30,900 flows out as service tax straightaway. Therefore, it is best to stay away from annuities, and opt instead for the more tax-efficient tax-free bonds and other more lucrative options such as bank fixed deposits or the Senior Citizens’ Savings Scheme for regular income. However, investors who have already purchased a pension plan or the New Pension System will have no option but to buy an annuity.

PAY OFF YOUR DEBTS

It is best not to carry loans when you have retired. If you have outstanding loans that charge you more than what your investments are earning, you will be better off if you prepay them. The quicker you clear your debts, the lower is the interest outgo. Also, avoid taking fresh loans at this stage. It may seem tempting, but resist the urge to invest in real estate at this stage, unless you want to shift to a smaller accommodation in the suburbs. “It’s a good idea to shift to a more manageable house unless you want to bequeath your property to your heirs,“ says Bala.

UNLOCK VALUE OF HOUSE

If you do not have a large corpus that can meet your needs, consider unlocking the value of your house by opting for reverse mortgage. “In the absence of sufficient retirement savings, a reverse mortgage loan allows you to harness the equity of your existing house as an alternative retirement corpus,“ says Rustagi. Under reverse mortgage, the owner receives a regular stream of income from a lender against the mortgage of his home.With every loan instalment, the bank increases its ownership of the house. After the death of the last surviving owner, the legal heirs have the option to either repay the loan or allow the bank to sell the house and give them the difference. But there are some conditions to be met. The scheme is open only to senior citizens, monthly payments cannot

OUR SUGGESTIONS

Can comfortably meet his target expenditure with current portfolio but needs to realign investments to optimise returns.

Cash of `5 lakh should be earmarked for contingencies but invested in a liquid fund for higher returns.

`15 lakh should be put into the Senior Citizens’ Saving Scheme to get a quarterly pension.

Invest PF proceeds into a short-term debt fund and initiate systematic withdrawal plan after three years to create a regular stream of income.

Divert risky investments in shares towards a large-cap diversified equity fund for better risk adjusted returns.

Review health insurance coverage as current cover is inadequate. Buy a cover of at least `5 lakh with top up of `5 lakh. exceed `50,000 and the property must be self-acquired, not inherited or gifted.

MAKE A WILL

While you do all this, don’t forget your estate planning. For many, the task of writing a will is best left for the later years, something they can do after retirement. Well, now that you have reached the destination, there is no reason to put it off further. A will is not something that only the super-rich need to write. If you don’t take the necessary steps beforehand, your loved ones will have to do a lot of running around to prove that they are your legal heirs. The assets that you have built over your lifetime will amount to nothing if your heirs cannot access them easily in the event of your demise. If you want to make sure that your daughter inherits your property, put it down in writing in your will.When making a will, do also mention an executor who will ensure that your directions are carried out.

Also, even though it is not compulsory to register the will, it is advisable to do so. You can change your will as many times as you want. So in case you have a change of heart about some aspect of the will a few years later, you can always alter the document. Once you make a fresh will, the old one automatically stands revoked, unless the new will is not properly executed.