Mr Batra is 56 today and will retire in two years. All his life he was invested in insurance and fixed interest instruments. Over the years, he became an expert and was acclaimed as the most knowledgeable amongst friends, colleagues, and the person to consult for 'safe avenues.'
His knowledge and skills were impeccable but over time they became inadequate and thereafter redundant. He has exposure to all kinds of policies including some unit linked as well. His overall asset allocation was 10% in equity and balance in debt.
He calculated that during his working life so far he has been able to invest about 15 lakh (Rs 1.5 million) and is likely to have a retirement kitty of 40 lakh (Rs 4 million). He proposes to have a retirement income of about Rs 20,000 on a pre-tax basis by purchasing an annuity plan from LIC earning him a 6% annuity lifelong with return of capital to his heirs upon his death.
This amount of Rs 20,000 is much lower than his last drawn salary of Rs 60,000 per month and he cannot imagine living his life and supporting his family in this amount. He seems to have no choice.
Something is not quite correct and something has significantly gone wrong somewhere, he feels. But the fact remains cast in stone. Had the same money been invested with an asset allocation of 50% equity and 50% debt he would have had more than Rs 3 crore (Rs 30 million) upon superannuation.
Some day, like Mr Batra, we may turn back and realize that we don't have enough, may be skills we not adequate and we completely lacked knowledge of generating wealth. It is then too late to realize what an OPPORTUNITY LOSS we have made.
The future years will be full of compromises; things will be worse . . . just let inflation catch up.
However given the situation is let's understand what is the best Mr Batra can do with his Rs 40 lakh in a situation like this:
Firstly, a very accurate assessment of living expenses needs to be done. Say, this is Rs 39,000 per month. His company shall provide a pension of Rs 7,000, so he needs to produce 32,000 per month from his 40 lakh.
Secondly, an appropriate rate of inflation needs to be worked out based on his lifestyle. This rate of inflation is a weighted average based on various expenditures constituting his lifestyle. (This needs expert help). Let's say this rate is 6.85%, hence his retirement income needs to rise by 6.85% per annum.
The above amount is the amount required after payment of income tax.
Hence, he needs to generate a post tax rate of return of 12.47% to sustain himself for the balance of his retired life. He will be able to manage himself comfortably but without luxuries. The good news is that he can sustain his lifestyle.
As a result his plan of investing into LIC annuity plan goes out of the window. His funds needs to be engineered and monitored with great precision so that 12.47% return materialises and also provides him a lifestyle based increasing retirement income at the rate of 6.85% p.a.
The final good news is that this is possible with active monitoring of a prudent asset allocation strategy.
Having said the above one can see that there will be strain, which could have easily, be ironed out if we have time in hand, i.e. if a proper retirement plan was initiated a few years in advance. In my experience I have seen that if a person is around the age of 50 with say 8-10 years left to retire all may not be lost.
Kartik Jhaveri, an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager. He may be reached at kartik@transcend-india.com.
Disclaimer: The contents of the above article are the intellectual property and copyright of the author, Kartik Jhaveri. No part may be used or reproduced in any form or manner. This article is purely educative and you are strongly advised to consult an expert prior to taking any significant decision. If you choose to act upon the information contained in the above article it is at your own risk.
For more on financial planning, log on to click here.
