For those in your 60s, these are the golden years. You have worked long and hard to deserve a very happy and fulfilling retirement. The pleasure of seeing your children settled and your grandchildren growing up makes this the most wonderful stage of your life. However, there are several financial concerns at this age. Today’s 60-somethings definitely have more savings and investments compared to their parents, when they were retired, but the cost of living has multiplied manifold. Many of today’s retirees, unlike their parents, do not want to be financially dependent on their children’s earnings. While lifespan has increased, health related issues are getting more complex. The retirees today are certainly facing headwind with high cost of living, increasing cost of healthcare and the spectre of rising inflation. With foresight and smart financial management in your previous decades, you should have set yourself a strong foundation for your retirement. However, here are some money principles for your 60s, which will help you successfully tackle these challenges.
Capital Protection:Capital protection should be a chief concern now. You should not be as exposed to the vagaries of the stock markets, as you were, when you were younger. The bias of your investment portfolio should primarily be fixed income. When considering debt instruments, you can evaluate both bank fixed deposits (FDR) and fixed maturity plans (FMPs) offered by mutual funds. You should factor in your tax situation, when selecting between a FDR and a FMP. While FDRs offer a greater degree of safety with respect to assurance of returns, FMP offers certain tax benefits, such the advantage of indexation or even double indexation when the term of the plan spans three financial years or more. While it is important to note that FMPs may bear credit risk depending upon the underlying instruments, historically it has been observed that FMPs have provided pre-tax returns equivalent to bank FDRs.
Ensure high liquidity:Liquidity should be an important concern for retirees, since there is no pay check at the end of every month. Post Office Monthly Income Scheme (POMIS) is offered by various post offices across the country and guarantees a regular monthly income. The minimum investment in this scheme is Rs 1,000 and the maximum Rs 300,000 singly or Rs 600,000. You earn an 8% interest on your POMIS deposit and 10% bonus after the end of tenure. The term of the deposit is 6 years, though you withdraw after a year with a penalty of 5% of the amount deposited. However, there is no penalty after 3 years in POMIS.
Equities can still be attractive:Though at this stage of life your portfolio should have a pre-dominantly fixed income bias, with increasing life spans, equities (appropriately weighted in your portfolio mix) may still be an attractive investment option, if you are looking for higher returns. Monthly income plans (MIPs) offered by mutual funds, may be a suitable option for you depending upon your financial plan. MIPs are a variant of balanced funds with 15 – 20% asset allocation in equities, thereby ensuring superior returns. The dividends you get here are tax free, but as you are aware, mutual funds are subject to market risk. If your risk profile is more aggressive you may allocate a portion of investments also to equity funds, with excellent track record of performance and regular dividend pay-out. You should consult with your financial advisor, whether these types of investments are suitable for you
Consider Senior Citizens Savings Scheme (SCSS):This is a savings scheme launched by the Indian government particularly for senior citizens. All seniors above the age of 60 years can invest in this scheme. The minimum investment limit in this scheme is Rs 1,000 and the maximum limit is Rs. 15,00,000. From a liquidity perspective, the scheme has a period of 5 years and carries an interest rate of 9 per cent, one the highest applicable rates for similar instruments. A penalty of 1.5% per cent is levied on the amount deposited, in case the deposit is withdrawn before 2 years and 1% if the amount is withdrawn after 2 years, but before the expiry of the term. This investment qualifies for deduction under section 80C of the IT Act, and if the returns from this instrument do not exceed the basic exemption limit of Rs 2.4 lakhs, they stand to earn tax-free returns. Seniors who have their immediate liquidity concerns addressed though other instruments, should try to maximise investments under this scheme using their surplus funds, since this offers attractive returns and capital safety
Use a Systematic Withdrawal Plan to redeem your equity fundsSeniors who have just entered retirement and have a substantial corpus parked in equity funds, a systematic withdrawal program (SWP) is more efficient and effective way of withdrawing money from their equity schemes, rather than redeeming it all at once. There are several advantages with SWP. (1) An SWP provides the seniors regular income, monthly or quarterly, depending on their requirements. (2) An SWP offers tax benefit, since the income (capital appreciation) is spread over several income tax periods. (3) An SWP protects the investors for market fluctuations. It is almost impossible to redeem your equity scheme when the market is at its highest point. SWP averages out return value and protects you from market fluctuations
Consider liquid funds as an alternative to savings bank:There is very little awareness about liquid funds amongst ordinary retail investors. A vast majority of people park their surplus funds in savings account for meeting emergency requirements. While having an emergency fund is fundamental to financial management for everyone, especially seniors, we should be aware that there are several options to achieve the same objective. Liquid funds can adequately meet this objective. While corporate houses regularly park their excess cash in liquid funds, seniors should also avail of these instruments for their own requirements. A careful analysis of returns will reveal that liquid funds provide substantially better return than savings bank. While savings bank interest is usually around 4%, liquid funds provide returns in the region of 8 – 9%. While liquid funds are subject to market risks, an analysis of the underlying instruments in a liquid fund ensures a very high degree of safety. Some liquid funds issue a debit card for your investment in the liquid fund, so whenever you require money you can withdraw from ATM.
Investment in Fixed Deposits:Fixed Deposit is a favorite investment choice for most senior citizens. One must be careful about the tax implications of fixed deposits. Fixed Deposits with term of over 5 years are tax exempt. However, please note the lock in period of 5 years. While both banks and corporate houses offer fixed deposits, bank fixed deposits are always a safer choice. Corporate houses often offer a higher interest rate, and may be a good investment option. However one must consider credit risks, for investment in corporate FDs. You should look at the credit ratings of corporate FDs (rated by CRISIL), and always choose deposits with AAA rating.
Ensure you have long term health coverage:Health is an important aspect of our life at any age, but is extremely important at this stage. It is important that you have a long term health insurance plan to address you and your spouse’s healthcare needs, even in your retirement years. There are several considerations in selecting a good long term heath insurance scheme. Maximum renewal age, treatment wise cover and co-pay policy, day wise cash limits, maximum available, are among other considerations. You should consult your financial advisor in helping you select the right policy.
Plan your estate carefully:Planning your estate is not just about planning and executing your will. There are considerations, like planning and executing power of attorney to someone you trust to take decisions on your behalf, in case you become incapacitated, i.e. unable to make decisions or take actions due to physical and mental impairment. Careful estate planning can save your near and dear ones from a lot of trouble.
Use surplus cash judiciously:There is several important investment and income planning considerations during your retirement, as discussed above. You should meet with a financial planner to make sure that your investment planning is appropriate for your risk profile and financial situation. You should consult with your financial planner on what your budget should look like and also to stress test your financial plans. If you have surplus cash after meeting all the above considerations, you should use it judiciously. This is a time, when you have more free time than you had in your busy careers. So you may head out on vacations with your family. You may pursue a hobby that you had sacrificed for the lack of time, earlier in your life. You may even want to start a small business, provided it has a short gestation period. It might be a wonderful occupation and may even help you achieve further professional and financial goals.