Managing your money after retirement

Pension | admin | August 5, 2011 at 6:31 am

Ambareesh Sinha is 65 years old and, seven years into retirement, he has found that the increasing cost of living has shot up his monthly expenses considerably. He has not sought re-employment, devoting his time to music and art instead. In order to augment his pension, he had saved a sizeable amount in fixed deposits and small savings schemes. He lives in his own house and has a wife to support. As far as possible, he wants to avoid seeking financial support from his children. What can Ambareesh do to ensure that he does not outlive his savings?

Ambareesh should deal with his problem by splitting his post-retirement life into two phases. The first phase would comprise the 10-12 years immediately after retiring, and the second would be the years following this. Ambareesh can take a few measures to augment his income during the initial phase and increase his corpus by seeking alternate employment. This will ensure that the corpus grows in value. The bigger the corpus, the greater its ability to generate income in the later years. Secondly, Ambareesh should recast his portfolio, which currently has only low-return investments, to include high-return instruments with slightly higher risk.

A small exposure to equity through mutual fund schemes, such as monthly income plans, balanced funds or even large-cap funds, will be suitable given his circumstances and will help the corpus to grow. This exposure can be taken in the early years of retirement. Ambareesh will then have a larger portion of his retirement corpus for the second phase of retirement years, when he is unlikely to be able to generate additional income. At this stage, it will be a good idea to use the corpus to buy an immediate annuity that covers him and his wife for life.

Insurance companies guarantee rates for life and will be able to offer good rates given the age and life expectancy. Inflation-adjusted annuities are also available, where the payouts are linked to inflation indices. Annuity may be a better option for Ambareesh rather than trying to manage his investments on his own in order to generate an income for a lifetime.

SMART THINGS TO KNOW: Exit loads in mutual funds

1 . An exit load is a charge that a mutual fund investor has to pay on the redemption of fund units. It is a percentage of the net asset value.

2 . Exit load reduces the amount available to the investor. If exit load is 1% and the NAV is Rs.10, the investor will get Rs.9.90 for every unit that is redeemed.

3 . Such a load is imposed primarily to discourage short holding periods and frequent redemptions. The longer the holding period, the lesser the exit load.

4 . Debt funds impose loads for redemptions after three months, while equity funds usually do so for those before the completion of one year.

5. Exit loads are imposed on redemptions of all forms, including systematic withdrawals, transfers and switches.

6. According to Sebi regulations, fund houses can use up to 1% of the exit load for their own sales expenses.

Opening a Senior Citizens Savings account

The Senior Citizens Savings Scheme (2004) is a five-year deposit that is offered by the post office and designated banks to senior citizens.

The scheme pays interest at 9% per annum from the date of deposit on a quarterly basis. The scheme is open only to Indian residents, but the Hindu Undivided Family (HUF) is not eligible to invest in it. Anyone above 60 years, or if retiring under the voluntary retirement scheme (VRS), a person between 55 and 60 years, is eligible to open an account. Those seeking VRS should do so within three months of the date of retirement. There is no age limit for retired personnel of defence forces.

Points to note

Multiple accounts : You can have more than one account subject to the investment limit. The deposit amount must be in multiples of Rs.1,000.

Transfer terms : The account can be transferred from one bank or post office to another, but not from one holder to another.

Interest on tax: One can invest a maximum of Rs.15 lakh. However, in case of retirees before the age of 60 years, the limit is restricted to retirement benefits or Rs.15 lakh, whichever is less.

Source: Economic Times