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How I Helped My Client : : WEALTH PLANNING FOR RETIREES




This is the case of an individual who was 65 years of age, and had already retired and wanted to plan for cash flows for the rest of his life…

So, what was his main wealth planning objective? – To invest his corpus of Rs. 1.50 crore, so as to meet his expenses of Rs. 1 lakh per month (i.e. Rs. 12 lakh per annum) on an ongoing basis. Another noteworthy point was he had a secondary corpus of Rs. 50 lakh which he preferred not to use for the plan.

Details were as follows:

Name: Mr. Jayesh Patel
Status: NRI
Life Stage: Retired
Investible Corpus: Rs. 1.50 crore
Risk Appetite: No risk –no capital loss is acceptable.
Goal: Assured monthly income of Rs. 1 lakh, starting immediately, going on for life.
Life Expectancy 85 years

Reason No. 1: The required return was not achievable in present times, by taking shelter under “safe debt investments” alone.

In order to earn assured income of Rs. 12 lakhs p.a. (post tax) from a corpus of Rs. 1.50 crore, assuming 30% tax, the pretax income required is approximately Rs. 17 lakhs per annum. The rate of return needed to earn this income is close to 11.50% p.a., which is currently unachievable, especially if corporate deposits are also not to be considered. Moreover, taking into account his low appetite for risk and guarantee for monthly income, exposing him to an equity allocation wasn’t the right option.

So, what were the available investment Options in “safe debt instrument”:

  1. Small Saving Schemes: When an individual looks safety and guaranteed return, small savings are the first that any wealth manager looks at. However, noting that he was an NRI, this option too was not available to do his planning. Small savings schemes such as PPf, Post Office Monthly Income Schemes, and Senior Citizen Saving Scheme – are off-limits for NRIs.
  2. Bank/Corporate FDs: Yes, we can explore this option too, noting that the required rate of return is 11.50% p.a. But, presently as bank FDs are offering only between 8.00% and 8.50 % for the 1-2 year tenure for senior citizens, this option too was ruled out.

Immediate Annuity Pension Schemes: Taking into account that he’s a retired individual, we evaluated this option too. But this again did not meet the expectations of 11.50% rate of return, as the rate of return offered on such products are  7.50% per annum- again pretax.

These are schemes wherein the investor invests his money as a lump sum / regular premium today and starts receiving premium payment immediately, going on far a specified term period or for life, as opted.

So, clearly, from a rate of return point of view, we are in a fix. And there was yet another reason why the corpus would not have been enough.

Reason No. 2: Inflation

Mr. Jayesh Patel needs Rs. 1 lakh per month (i.e. Rs. 12 lakhs p.a.) post tax today. That’s 11.50% return pretax. But taking 7% average inflation rate, he will need more income, from the same principal (Rs. 1.50 crore), to meet the same lifestyle expenses. Here’s a snapshot:

 

Monthly income(Post tax) in Rs Annual income(Post tax) in Rs Annual income(Post tax) in Rs Pretax rate of return
Income required today 1,00,000 12,00,000 17,15,000 11.50%
Income required in 5 years 1,40,000 16,80,000 24,00,000 16.00%
Income required in 10 years 1,96,000 23,50,000 33,60,000 22.40%
Income required in 5 years 2,76,000 33,12,000 47,32,000 31.50%

*Figures are approximate

And all the while “his investible corpus remains the same i.e. Rs. 1.50 crore. So, given the facts, in present times the solution was simple and realistic.

We said at current rates of interest and given risk appetite and required corpus – the goals is not achievable, and the only way out was adjust the goal or increase the available corpus.

The solution: we can guide Mr. Jayesh Patel through what he needs to do in order to make the most of his available corpus while making sure he is within his comfort zone on the risk appetite front. The wealth manager can provide him with a cash flow for his whole life, showing how his income would be generated, and how his expenses would grow with inflation.

With a corpus of Rs. 2 crore, and taking no risk on his capital, Mr. Jayesh Patel is able to achieve monthly income Rs. 72,000 approximately, growing yearly to meet inflation.

Key Takeaways

As wealth manager I am to  provide an investor with a true and unbiased wealth plan, thus not just helping him achieve his financial goals, but are ensuring that he is financially healthy, by taking only optimal risk to achieve the required rate of return.




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PlanetWealth Financial Advisors
Email: care@planetwealth.in
Phone: +919328190022
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Bhavnagar, Gujarat 364001