A couple after retirement want to ensure they have enough funds to maintain their high standard of living and meet future needs
D Sundararajan
Venkataraman came to us to consult his post retirement investment planning and overall financial planning. “I have been working in a very senior position with a “nav ratna” public sector company. I am used to a very high standard of living thanks to my very good working conditions. I have opted to retire two years before my actual date of retirement so that I can relax and enjoy the fruits of my long years of labour—both my sons are well educated and settled comfortably in their respective lives. I want you to help me finalise a plan that will ensure that I would not have to compromise my standard of living post my retirement and also ensure that our resources will take care of me and my wife for the rest of our lives,” he said. Venkataraman also added that his wife was very conservative and so my investment plan should not be too aggressive. Besides these financial assets the couple own two houses. They moved out of the company flat to the Navi Mumbai house after retirement. The other house, a two bedroom, hall, kitchen flat in Mumbai’s western suburbs, has been rented out. Venkataraman’s cash flow position consisted of pension of Rs 21,000 and rent from the second house, net of taxes, of Rs 25,000. Thus, the total income per month came to Rs 46,000. Venkataraman said this income would be sufficient for the couple to meet their routine expenditure. He also expressed that he may need additional Rs 3 lakh every year, which can be generated on a yearly basis, for payment of taxes, visiting his children staying abroad etc. He added that since his company provided full medical cover for the couple, there was no need for any health insurance cover. Venkataraman’s major concern was inflation and whether the couple could cope up and maintain the current standard of living with their capital for a long term. We explained to the couple the need to invest some portion of their overall financial assets in equity/equity oriented mutual funds as this is the only asset class that has managed to deliver returns higher than inflation consistently over a long period of time. However, in view of the rising interest rates in the economy and the possible slowdown in overall economic growth rate and corporate earnings growth rate, we suggested a gradual increased exposure to equities through the Systematic Transfer Plan (STP) route rather than direct lump sum investments now. In view of the conservative profile of the couple, we also recommended that some amounts be invested in a gold exchange traded fund (gold ETF). Since the prices of commodities like crude and gold have been rising, it could be a good idea to invest in gold. We explained the concept of ETFs and how a gold ETF is different from stocks—even though it is listed and traded on the stock exchange and how it is different from conventional gold from taxation angle. Fixed term plans, or FMPs, of mutual funds of a duration of more than one year with indicative yield of 9.5% to about 10% per annum offered the best investment choice for a high net worth individual like Venkataraman due to the lower rate of taxation. We explained how he can manage to earn more than 9% per annum net of tax returns on a short-term fixed income option by investing in FMPs. We also explained the concept of taxation on long-term capital gains on non equity oriented funds on which Securities Transaction Tax (STT) is charged at 10% of long-term capital gians, or 20% after applying the inflation index to the cost of acquisition. This route will ensure an annual income to Venkataraman and Vasumathi, which can also serve the purpose of paying their overseas trips and taxes, if any. As regards the additional investments in bank fixed deposits, we recommended that it would be a good idea to commit these funds for a long term of say five years. Currently, the interest rates are high compared to the last few years due to the high inflation. Interest rates may come down over the next six months to one year. After considering the above factors, we suggested Venkataraman invest in a gold ETF and a mutual fund FMP (see table titled “Investing plan”). We explained the inherent re i nve s t - ment risk in committing a huge amount of Rs 25 lakh to one-year FMP at a time when the longer term interest rates are also higher. The couple understood the concept and agreed to go ahead with the plan because they would like to increase their exposure to equity gradually, especially if the interest rates on fixed income options were to come down over the next year or so. They agreed that this was indeed a very conservative plan and shall look at increasing the exposure to equity as they gain more confidence over the next few years after assessing the performance of their portfolio. MEET THE FAMILY A V Venkataraman, aged 58 years, recently retired after more than 30 years from a very senior position in a public sector company. His wife, Vasumathi, aged 52 years, took voluntary retirement from a public sector bank after working for more than 20 years. They have two sons, both married and well settled and are staying abroad. The couple has no dependants
D Sundararajan
Venkataraman came to us to consult his post retirement investment planning and overall financial planning. “I have been working in a very senior position with a “nav ratna” public sector company. I am used to a very high standard of living thanks to my very good working conditions. I have opted to retire two years before my actual date of retirement so that I can relax and enjoy the fruits of my long years of labour—both my sons are well educated and settled comfortably in their respective lives. I want you to help me finalise a plan that will ensure that I would not have to compromise my standard of living post my retirement and also ensure that our resources will take care of me and my wife for the rest of our lives,” he said. Venkataraman also added that his wife was very conservative and so my investment plan should not be too aggressive. Besides these financial assets the couple own two houses. They moved out of the company flat to the Navi Mumbai house after retirement. The other house, a two bedroom, hall, kitchen flat in Mumbai’s western suburbs, has been rented out. Venkataraman’s cash flow position consisted of pension of Rs 21,000 and rent from the second house, net of taxes, of Rs 25,000. Thus, the total income per month came to Rs 46,000. Venkataraman said this income would be sufficient for the couple to meet their routine expenditure. He also expressed that he may need additional Rs 3 lakh every year, which can be generated on a yearly basis, for payment of taxes, visiting his children staying abroad etc. He added that since his company provided full medical cover for the couple, there was no need for any health insurance cover. Venkataraman’s major concern was inflation and whether the couple could cope up and maintain the current standard of living with their capital for a long term. We explained to the couple the need to invest some portion of their overall financial assets in equity/equity oriented mutual funds as this is the only asset class that has managed to deliver returns higher than inflation consistently over a long period of time. However, in view of the rising interest rates in the economy and the possible slowdown in overall economic growth rate and corporate earnings growth rate, we suggested a gradual increased exposure to equities through the Systematic Transfer Plan (STP) route rather than direct lump sum investments now. In view of the conservative profile of the couple, we also recommended that some amounts be invested in a gold exchange traded fund (gold ETF). Since the prices of commodities like crude and gold have been rising, it could be a good idea to invest in gold. We explained the concept of ETFs and how a gold ETF is different from stocks—even though it is listed and traded on the stock exchange and how it is different from conventional gold from taxation angle. Fixed term plans, or FMPs, of mutual funds of a duration of more than one year with indicative yield of 9.5% to about 10% per annum offered the best investment choice for a high net worth individual like Venkataraman due to the lower rate of taxation. We explained how he can manage to earn more than 9% per annum net of tax returns on a short-term fixed income option by investing in FMPs. We also explained the concept of taxation on long-term capital gains on non equity oriented funds on which Securities Transaction Tax (STT) is charged at 10% of long-term capital gians, or 20% after applying the inflation index to the cost of acquisition. This route will ensure an annual income to Venkataraman and Vasumathi, which can also serve the purpose of paying their overseas trips and taxes, if any. As regards the additional investments in bank fixed deposits, we recommended that it would be a good idea to commit these funds for a long term of say five years. Currently, the interest rates are high compared to the last few years due to the high inflation. Interest rates may come down over the next six months to one year. After considering the above factors, we suggested Venkataraman invest in a gold ETF and a mutual fund FMP (see table titled “Investing plan”). We explained the inherent re i nve s t - ment risk in committing a huge amount of Rs 25 lakh to one-year FMP at a time when the longer term interest rates are also higher. The couple understood the concept and agreed to go ahead with the plan because they would like to increase their exposure to equity gradually, especially if the interest rates on fixed income options were to come down over the next year or so. They agreed that this was indeed a very conservative plan and shall look at increasing the exposure to equity as they gain more confidence over the next few years after assessing the performance of their portfolio. MEET THE FAMILY A V Venkataraman, aged 58 years, recently retired after more than 30 years from a very senior position in a public sector company. His wife, Vasumathi, aged 52 years, took voluntary retirement from a public sector bank after working for more than 20 years. They have two sons, both married and well settled and are staying abroad. The couple has no dependants
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