Inadequate diligence in financial planning led to a situation where individuals’ savings could not even see them through the 60-day COVID-19 lockdown. So, the question arises whether people adequately plan for their 25 or 30 years of retired life? Retirement planning is the most important financial goal of any person because it ensures comfortable and hassle-free retired life for him. The ongoing lockdown has once again highlighted the significance of this vital financial aspect in many ways. The lockdown disrupted household incomes and brought small and medium businesses to a grinding halt. Therefore, the government provided succor to people by permitting them to withdraw 75% of their savings from their Employees’ Provident Fund Organisation (EPFO) accounts. Consequently, more than 6.5 lakh subscribers withdrew an unprecedented ₹ 3,000 crore from their PF savings within the month of April 20. Besides this, it also disbursed ₹ 764 crores to about 65 lakh pensioners under its pension scheme. During the lockdown, our government’s decision to reduce the interest rate on small savings schemes by 70 to 140 basis points (100 basis points = 1 percentage point) adversely impacted the senior citizens’ monthly income. Furthermore, the market volatility and economic downturn precluded the people to liquidate or make a partial withdrawal from their equity and debt investments. All these are indicators that there is no guarantee of future income and one must carefully plan for his retirement with in-built flexibility, resilience, and capital protection.
Primarily, a person’s retirement income comes from two sources; namely, pension and savings. In India, some of the available pension schemes for employees are the National Pension System (NPS), which works on a defined contribution basis and has two tiers – Tier-I and II. The other one is the Employees’ Pension Scheme (EPS), which is a social security scheme provided for the organized sector workers by the EPFO. For the unorganized sector, the government launched the Pradhan Mantri Shram Yogi Maandhan (PMSYM) Scheme, in Budget 2019-20, which enables a minimum monthly pension of Rs 3,000 for the worker through a monthly contribution of ₹ 55. The government pays monthly pensions to all its employees and their families who joined service before 01 Jan 2004, as per its existing pension rules. Besides these, any resident Indian can invest in a Unit Linked Pension Plan (ULPP), which are pension schemes with inbuilt insurance and are available through numerous asset management companies (AMC). However, the pension is seldom adequate to cover the retiree’s monthly expenses, growing healthcare expenses, and rising inflationary costs. Ipso facto, he must rely partially on his savings to supplement his pension, or entirely on his savings if he has not subscribed to any of these pension schemes.
The second source of income for a retiree is his savings in the form of retirement corpus. It will be financially imprudent for him to think that he can survive with the retirement emoluments, which he will receive from his employer at the time of his retirement. Therefore, he must accumulate his retirement corpus during his earning years through systematic and lump sum investments. Let me explain this with the help of an example. Suppose an individual’s monthly expense at the age of 30 is ₹ 1 lac, his total savings are ₹ 5 lac and his monthly savings are ₹ 10,000. If he retires at the age of 60 and lives till 85 years of age, then his monthly expense at 60 years will be ₹ 5.74 lac assuming a 6% inflation rate. To meet this monthly expense, he must have a retirement corpus of ₹ 13.89 crore when he retires. Since his primary need is to protect this capital, let us assume that he invests this corpus to grow at a modest 8% rate of return during his retirement period. Since his young age is suggestive of his aggressive risk profile, we assume that at 12% rate of return his existing savings of ₹ 5 lac will grow to 1.50 crore and his monthly savings of ₹ 10,000 will grow to ₹ 3.53 crore in the next 30 years till retirement. Therefore, to accumulate the desired corpus for leading a comfortable retired life till 85 years of age, he must either make a lumpsum investment of ₹ 29.60 lac at the age of 30, or invest a monthly SIP of ₹ 28,776 for the next 30 years, in a mutual funds that give a probable 12% rate of return. The retirement emoluments that he will receive from the employer at the time of his retirement and his pension, if any, will reduce the amount of the corpus required accordingly.
The main concern of retirees is to invest this retirement corpus in a manner that can assure their monthly income, grow at a rate to keep up with the inflation, and stay safe and secure. Towards meeting these requirements, the retiree should invest at least 60 to 70% of his corpus in fixed income and safe financial instruments including liquid mutual funds, about 20 to 30% in equity and debt mutual funds for capital growth to beat the inflation, and 10% in gold mutual funds/ETF as a hedge against market volatility. The table below shows some available fixed income options:
The financial disruption caused by the lockdown in the monthly income of senior citizens from their savings has reinforced the idea of maintaining an emergency fund. As the name suggests, they should create this fund for a rainy day and utilize it as a last resort only when they have exhausted all other options. Once used, they must replenish the fund as soon as possible. This fund should be highly liquid and cater for 4 to 6 months of their monthly expenses. Thus, the options for its investment during the normal course are either in liquid or short duration mutual funds with AAA rating portfolio holdings or sweep fixed deposits of public sector banks with ATM withdrawal facility. To cater for the inflation, after deciding the original amount, the retiree must upwardly revise the total holding in this fund every 2 to 3 years.