Making your savings go farther

When you are working,the risk that you run is that you may die early,leaving your family without a breadwinner. This risk is covered by purchasing life insurance (a term policy works best). But after you retire the nature of risk changes: now the risk you run is that you may live for too long! Typically,at the time of retirement,the corpus you have accumulated looks adequate. But remember that now you are waging war against inflation. If at age 60 Rs 30,000 suffices to meet your monthly living expenses,then by the time you are 80 you will need at least Rs 1,16,090 to meet those same needs (assuming a 7 per cent rate of inflation). So,how are you going to make your savings last and also grow for the next 20 years or more?

Bifurcate the corpus

At this stage,a part of the corpus you have saved should be used to generate a regular monthly income. The rest should be invested in such a way that it keeps growing and can help you fight inflation.

Meet your monthly expenses

First,determine your monthly needs. According to Veer Sardesai,a Pune-based financial planner,“It is imperative that you generate only that much monthly income as you need. If you generate more,you end up paying tax on it. Avoid that.”

Next,calculate what income you will earn from alternative sources. If you own a second house that is rented out,it’s a valuable income stream (its advantage being that it’s inflation-protected since rent can be revised in line with inflation). Moreover,nowadays people don’t completely stop working once they retire. They take up consultancy assignments and other part-time work. See how much you can earn from these sources.

If you need

Rs 30,000 each month and these two sources can fetch you Rs 15,000,then you only need to generate Rs 15,000 from your corpus.

Two instruments — the Post Office Monthly Income Scheme and annuities (from life insurance companies) — do the job of producing a guaranteed monthly income well.

Post Office Monthly Income Scheme (POMIS). It has a six-year tenure and pays a rate of interest of 8 per cent. At the end of six years,the principal is returned to you along with a bonus of 5 per cent.

Typically in these six years your needs would have grown. The principal that you reinvest will have to be larger (this will have to be pulled out of your investment corpus).

Sardesai finds POMIS convenient. “Since it is short-term in nature,it is easier to revise the principal invested and thus keep pace with your increased monthly income needs,” he says.

Vishal Dhawan,a Mumbai-based financial planner,points out the risk associated with POMIS. “Being a short-term instrument,POMIS carries the reinvestment risk. Since in India we are structurally moving towards lower interest rates,the risk is that when you go to reinvest the principal you would get a lower rate of interest. This has not been apparent for some time because the rate of return on POMIS has not changed for the last few years. But it could well happen. After all,POMIS used to pay a 10 per cent maturity bonus earlier,then the bonus was done away with,and later a 5 per cent bonus was reintroduced.”

Annuities. Dhawan suggests investing a part of your corpus in annuities. “When you do retirement planning,you assume that you will live up to a particular age. But that is an unpredictable event. In an ideal world,you would say that you can manage without annuities because you have enough to live on till the age of 75 or 80. But there is no way you can predict how long you will live. An annuity allows you to cover that risk. Of course,inflation impacts how much the amount that you receive from the annuity will be worth. The consolation,however,is that you will continue to be paid a fixed amount as long as you are alive,” says Dhawan,pointing out both the strengths and weaknesses of this product.

In case of annuities the returns tend to be a little lower than what you would get from a shorter-term instrument. The amount you get also depends on the option you choose: whether you want a sum of money to be paid for a fixed period (say 10 years),for your lifetime,or until either you or your spouse is alive.

Thus,both POMIS and annuities have their own advantages and risks. While POMIS carries the reinvestment risk,the returns from an annuity are affected by inflation. The answer perhaps lies in distributing your corpus (that you are using to generate the monthly income) partly between these two instruments.

Using laddered fixed deposits to generate a monthly income has the disadvantage that you have to pay TDS (tax deducted at source) on the interest earned.

Create an emergency corpus

A part of the balance you are left over with should be used to create an emergency corpus. According to Kartik Varma,founder of iTrust,a Gurgaon-based financial advisory firm,“At least 20 per cent of your corpus should be in liquid instruments,such as liquid funds of mutual funds,where you can access it in an emergency — in case you have an accident or require some other hospital procedure.”

Invest for growth

What is left should be invested. A mix of equities (index funds alone or a mix of index funds and a few high-quality actively managed equity funds),Public Provident Fund (PPF) and gold can serve your investment needs quite nicely.

Finally,as mentioned earlier,from time to time withdraw some money from this investment portion and invest it in monthly-income generating assets (POMIS or annuity) so that your monthly income increases and you can maintain the lifestyle that you are accustomed to.