Do not go gentle into that good night.
Old age should burn and rave against the close of day;
Rage, rage, against the dying of light.
It’s your last day in office: you’ve turned 60 and are ready to go into the golden sunset. What stretches out in front of you is the time of your life you’ve often dreamed about: a round of golf in the morning, lazy afternoon siestas, barefoot in the park in the early evening with your grandchildren, a late-evening sundowner and an unhurried dinner. Ah bliss! A wonderful lotos-eating retirement plan with no care or worries! Or, is there a nightmare just waiting to happen to wreck that beautiful dream'
If you’d planned your finances properly, you should have been able to provide quality education to your children and helped them get on with their lives. The kids have possibly flown the family coop — and you can look forward to spending some great quality time with your significant other.
If you hadn’t planned, you might want to echo Dylan Thomas’ sentiment expressed in his poem to his father who was diagnosed with throat cancer.
At 60, the financial objectives that most people are likely to have are to protect their capital and make it grow enough to outlive them. But that’s no mean challenge if you have to balance safety with liquidity and return.
At that age most people wouldn’t have a huge appetite for risks, and would seek to park their savings in zero-risk products like term deposits and RBI Relief Bonds. But the return on these products is quite low and may not be enough to fulfil your needs.
Insurance experts say retirement cuts your expenses by 25 per cent. This means if you were spending Rs 20,000 per month before retirement, you’d be spending Rs 15,000 after you’ve hung up your shoes. Making ends meet could be difficult without a pension.
At 60, the only pension plan that you could invest in is LIC’s Varishtha Bima Yojana — a single premium-policy from which you could draw up to Rs 2,000 in monthly pension. Depending on your cash needs, you could choose from monthly, quarterly, half-yearly or annual pension plans. The premium varies in accordance with how often you draw the pension. If you wish to draw Rs 2,000 in monthly pension, you’d have to pay a premium of Rs 2,66,665, whereas for an annual drawing of Rs 24,000, your premium would be Rs 2,55,845.
Varishtha Bima Yojana is highest paying risk-free investment. You shouldn’t wait till you turn 60 to invest in it — the minimum qualifying age is 55. But don’t miss the flipside: the premium is locked for 15 years, and the income is fully taxable.
You don’t have many choices at the age of 60, and Varishtha Bima Yojana alone wouldn’t be sufficient. Insurance experts say you should have invested in at least one more pension plan. And invest in it as early as possible. The earlier you invest, the higher the returns.
“You should ideally invest in a pension plan by 30,” says Vivek Khanna, marketing director of Aviva India Life Insurance. “What you should have also invested in is a whole-life policy, so that in the event of your death, your dependants received a lump sum which they could live on.”
Though medical expenses keep rising at this age, you can’t get a comprehensive cover at 60. Most critical illness riders that you could buy with a life insurance policy expire at 60 or 65 even if the policy hasn’t matured.
And if you buy a medical insurance policy at this age, you’ll not only have to pay a huge premium, you’ll not be covered for all illnesses. Say if you are diabetic, you’ll not be covered for any illness that could be attributed to diabetes.
Deft management of your savings and retirement benefits is essential to beat inflation and generate enough cash to meet your requirements. Though safety of principal is paramount, in the current market scenario you have to have stomach for a little bit of risk.
“If the government could consider investing its provisions towards employees’ pension in the stock market, why shouldn’t an individual'” asks veteran stockbroker Ajit Day.
“If you’re averse to risk, invest 20 per cent of your cash in equity — half of it in an equity fund and the other half in blue-chip stocks. Unless you’re very unlucky, most blue-chip stocks would return 20 per cent in dividends and capital gains over a three to five year horizon. To balance the risk, you could invest in an index fund — a mutual fund scheme that tracks market indices.”
The rest could go into fixed-income instruments. You could put up to Rs 3 lakh (and Rs 6 lakh jointly with your spouse) in a post office monthly income plan that pays 8 per cent annually and 10 per cent bonus on maturity after six years. Other risk-free options are RBI Relief Bonds and term deposits.
RBI Relief Bonds come in two variants: 8 per cent fully taxable and 6.5 per cent tax-exempted. The post office offers the best rates on term deposits. For a one-year deposit, it pays 6.25 per cent, whereas State Bank pays 5.5 per cent and HSBC, 3.75 per cent. Most banks offer 0.5 per cent extra to senior citizens on deposits of Rs 10,000 or more. (Income from term deposits and post office MIP up to Rs 12,000 is exempted from tax under section 80L.)
Since there’s no cap on investment in RBI Relief Bonds and term deposits, you could invest all your money in these instruments. A rough calculation shows you could earn a little around Rs 9,500 per month (net of taxes) on an investment of Rs 15 lakh in Varishtha Bima Yojana, post office monthly income plan and RBI Relief Bonds.
Though your principal would have been 100 per cent secure if you had invested in these instruments, you’d have sacrificed liquidity for the whole amount. But liquidity is just as important as safety of principal. Some experts say if Rs 15 lakh is all you have, as much as 75 per cent of it should be invested in liquid instruments.
On an average 40-50 per cent of your investments should be in liquid instruments. Term deposits of short duration pay a pittance. Mutual funds are best vehicle for liquid investments.
Dhirendra Kumar, a mutual fund analyst, says you shouldn’t put more than 10 per cent of your savings in equity, and that should be essentially routed through mutual funds. “You should invest to the limits in Varishtha Bima Yojana and post office MIP, and 10 per cent in a well-diversified equity mutual fund. The balance you should invest in a medium-term debt fund. It should be a large one — say with a Rs 2,000-crore corpus — and be more than five years old.”
So what kind of growth could you reasonably expect on your savings' Day says nothing less than 12 per cent would be sufficient to meet your needs, but most experts agree that 8-9 per cent (net of taxes) is a reasonable expectation.
So if you have a corpus of Rs 15 lakh, invest Rs 9 lakh in zero-risk products (like Varishtha Bima Yojana, post office monthly income scheme, RBI Relief Bonds) and the balance in liquid instruments — mutual funds. In accordance with your appetite for risk, you could invest all of it in bond funds as Arpit Agarwal, head of private banking at ICICI Bank, suggests, or put a small portion (say Rs 1.5 lakh) in equity.
If you had a bigger corpus — say Rs 20 lakh or more — you could afford to invest a bigger portion of your savings in illiquid instruments. And if your employer paid a pension, you could afford to be a bit more courageous.
The return on your investments would rise and you’d have more flexibility when you turn 65. Senior citizens enjoy a special Rs 20,000 rebate on income tax, which means you could put more money in taxable instruments.
Hopefully, you have seen the light, and will not have to rage, rage against the dying of light!