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Nearing 60 and retirement not planned?

If planning for later years slipped your mind, here's how to use MFs to generate more income

Ideally, retirement planning should start as soon as you receive your first salary cheque. Even if this sounds too far fetched, the fact is that planning for later years should start sooner than later. That’s because, the more time you give your money to grow, the more it will grow. But what if you ignored this and are nearing 60?

Financial planners say that many investors have a tendency to not look beyond the fixed-return instruments. Delhi-based financial planner Surya Bhatia says he has met many investors who are on the verge of retirement but are saddled with products they don’t need. “They have insurance policies, many of which they would have started just 4-5 years before retirement. So, they have to keep paying for these for another 15 or so years," he said.

Real estate is another such product, said Bhatia. People have invested in under-construction projects where the builder would have deployed investors’ money as a convenient alternative to borrowing from a bank. The builder would be paying, say, 12% interest, to the investors but this money is taxable, he added.

If such products are not going to be useful, then the last big hope is from the pension corpus that you are likely to receive on retirement. Here’s how you can use it.

Assess monthly expenses

Your pension corpus could be in lakhs or even a few crores if you’ve worked at a mid- to senior-level through your career. But you don’t have to invest this entire amount in mutual funds (MF) to take care of your monthly cash flows. Let’s work backwards.

To be able to decide on your investment amount, you need to ascertain how much money you need to earn. Before that, it’s important to know your monthly expenses. “Also, assume some kind of life expectancy—the number of years you expect to live," said Nishant Agarwal, senior director and head, products and family office advisory, ASK Wealth Advisors Pvt. Ltd. But expenses go up with every passing year with inflation. So, inflate your expenses at an assumed rate of, say, 7%. You could choose a higher rate if you want to be more conservative.

Next, you need to check how much money your fixed income portfolio yields on a month to month basis. The shortfall is what you need to earn from your MF investments, which is an indication of how much money you need to invest now.

Ladder approach

Although you invest your entire pension amount at one shot (or perhaps through a systematic transfer plan over a period of six or so months), your earnings will be spread across months and years. It’s all about managing your cash flows. In simple words, you need money when you turn 65, when you turn 70, then 80, and so on.

Try a ladder approach. And given the liquidity needed at that age as well as the risk profile, we suggest that you stick to a mix of liquid and short-term bond funds, monthly income funds, balanced funds and large-cap equity funds. “Avoid mid-cap schemes as the volatility can hit retirees very hard given that this corpus is the only thing that they’ve got," said Dilshad Billimoria, founder and chief financial planner, Dilzer Consultants Pvt. Ltd.

Keep some portion of your corpus in debt funds for the money that you need to earn in the near term. For the money that you need to earn beyond five or so years, opt for a mix of hybrid funds and equity funds. In debt funds, stick to a combination of liquid funds and short-term bond funds.

The planning will depend on your corpus and goals. Liquid funds should be used for inflows required for periods up to a year. Short-term bond funds are better utilized for money that’s required for beyond a year but up to five years.

For the period of five years beyond that, (say, for inflows required between ages of 65 to 69) use monthly income plans. For ages 71 to 75, go for balanced funds. And for inflows that you need beyond that age, simply go for equity funds. “Equity is volatile in the short run but over the long term, comfortably beats inflation. And since this money is not required for at least another 10 years, retirees shouldn’t worry about the short-term volatility," said Nikhil Kothari, chief financial planner, Etica Wealth Management Ltd, a Mumbai-based financial planning firm.

Need for a plan

All this planning might look daunting but it’s not that tough. “An investor who has just turned 60 or is a little short of it, would have a good idea of what her expenses are and what her regular return instruments yield. It’s understandable if a person in her 30s or 40s cannot decide her monthly expense because at that age there are many goals to be planned for. But when you’re at an older age, you have enough experience to know where you are and what you want to aim for", said Bhatia.

Besides, if you haven’t yet planned for your retirement and are just about to retire, a little bit of extra effort is required to ensure that you are well looked after in the later years.

In our example in the table given above, we have assumed a monthly expense of 50,000, an inflation rate of 7% and annual return of 3 lakh from fixed income instruments. Feel free to tinker with these figures as per your lifestyle and existing investment portfolio. All things remaining constant, the more income you already earn through your fixed-income yielding portfolio, the lesser will be the shortfall in the amount that you need and, accordingly, lesser will be the MF investments needed.

Remember, it’s always better to start planning your retirement as early on in life as possible. But if you haven’t done that, and are now on the fringes of 60 years and nearing retirement, some quick calculations and careful planning can go a long way in helping you.

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