Post-Retirement Financial Planning

Post-retirement financial planning is crucial for providing an individual with a secure future while maintaining a comfortable standard of living. However, people often under-estimate the corpus required post-retirement and overestimate the existing savings and investments. For example, it is usually assumed that settling the housing loans and other long-term debt after retirement will reduce the monthly cash outflows. On the contrary, healthcare expenses often increase with an increase in age. As such, individuals, therefore, need to plan their post-retirement financials with utmost caution, more so to cover the risk of living longer than expected.



The traditional investment options such as bank FDs took over a significant share of the retirement corpus, and the monthly interest pay-outs used to take care of the regular expenses. However, the corpus needs to be invested for regular income as well as growth, so that the invested assets will continue to support the retiree long into the future.

The essential post-retirement investment criteria to be considered while choosing an investment avenue are safety, liquidity, regular cash-flows, lower tax liability & keeping up with inflation. A post-retirement financial plan should begin with an assessment of the basics like determining current net worth, expected income, and expenses. Evaluating these factors will help to determine how long available assets will last in providing retirement income at various rates of investment returns, inflation, and spending. 

CASE STUDY:

Sudeepta Kishore Dash retired as Executive Director, NALCO, who had his Provident Fund Balance of Rs. 1.74 crore as the Post - Retirement Investment Corpus, which he wanted to allocate under a suitable portfolio that can provide for all his immediate, short-term & long-term financial goals.

NET WORTH: His assets include Real Estate value of Rs. 1.5 Cr, Savings & Bank FD of Rs. 6 Lacs, Equity Funds Rs. 18 Lacs, Stocks Rs. 6 Lacs, NPS Rs. 30 Lacs & EPF Balance of Rs. 1.74 Crore. Only Home Loan of Rs. 8 Lacs is pending as Liabilities. Hence, the Net-worth is a positive amount of Rs. 3.76 crore.
CASH FLOWS: Monthly Income post retirement includes Pension of Rs. 4000, Rental Income of Rs. 12000 & FD Interests of Rs. 3125, all totalling to Rs. 19125 per month. Monthly Expenses include Household expenses of Rs. 70000, Housing Loan EMI of Rs. 33000, Insurance Premium Rs. 3000p.m & SIP of Rs. 42000.

POST-RETIREMENT GOALS: He wants to maintain a contingency reserve of at least Rs. 10 Lacs, wants to set-off Rs. 2 Lacs every year for vacation, wants to purchase a car immediately worth Rs. 13 Lacs & needs a monthly cash flow of Rs. 70000 every month. He has extended his NPS for another 5years.

PRELIMINARY RECOMMENDATIONS:To meet the basic expenses as well as to maintain a healthy liquidity situation (without compromising on the Portfolio Growth), the following preliminary recommendation was made:
i. Equity Portfolio of Rs. 18 Lacs must be enhanced to a minimum of Rs. 20 Lacs.
ii. Current monthly SIP investment of Rs. 42, 000 to be reduced to Rs. 30, 000.
iii. Home Loan of Rs. 8 Lacs to be repaid immediately to reduce the monthly outflow by Rs. 33, 000.
iv. Monthly expenses should be drawn from the contingency fund, which will be replenished at the year-end from the regular pay-out portfolio.
v. Total portfolio plan will be for the following amount:

(Retirement corpus + Equity MF corpus + Savings & FD Balance – Car Purchase – Housing Loan payoff) = Rs. 1.74 CR + 18 Lacs + 6 Lacs – 13 Lacs – 8 Lacs = Rs. 1.77 CR.
 
Monthly cash flows required (Household Expenses + SIP + Insurance Premium – Total Monthly inflows) =Rs. 70,000 + Rs. 30,000 + Rs. 3,000 – Rs. 19,125 = Rs. 83,875
 

PORTFOLIO PLANNING : Considering the investment needs as well as the risk profile of Mr. Sudeepta, a staggered approach towards portfolio planning has been suggested as below:
1. Regular Monthly Pay-out Investment Portfolio - Aimed at providing regular monthly income post-retirement
2. Growth Investment Portfolio- Aimed at providing Capital Growth for next 5-years at minimal risk, in sync with the Customer’s Risk Profile.
3. Liquid Investment Portfolio- Aimed at providing adequate resources for Contingency and also to meet the short-term goals of the customer in the next 2-3 years’ time horizon.

SUGGESTED POST-RETIREMENT PORTFOLIO



EXPECTED POST - RETIREMENT PORTFOLIO VALUATION AFTER 5 YEARS :

Analysing the expected performance of the portfolio, the total Portfolio valuation is expected to be Rs. 2.12 crore after 5 years, even after a regular monthly pay-out aggregating to Rs. 52.12 Lacs.

For more information contact
Bibhuti Bhusan Dash, Lotusmint Advisors Pvt Ltd .
Email: lotusmintadvisors@gmail.com
Website : www.lotusmintwealth.com