This post is about a recent interaction I had with a lady who wrote to me about their current retirement plans. Her husband was running a small business and is about 53 years old and they have one son who is settled. For some reasons, they want to retire and wanted to understand if their current money availability would be enough for about 30 years or so.
Now my first inclination was to say – as your annual expenses are 6 lacs, you need about 2 crores assuming some other expenses like replacing car or furniture etc. That would be sufficient to take care of their retirement needs, unless there was a requirement for assisted living beyond 80 years of age or so. They would just have to hope that their son chipped in for it.
When she said that they did not really have 2 crores in cash, it came as a surprise to me. I guess we are so used to talking in the blogs and face book forums about the need of at least 5 crores and above if you hope to retire, that we forget there may be many who do not have such amounts. Does it mean they cannot retire or they necessarily need to depend on their children for their retired life? I decided to take a closer look at what they had, before I came to any conclusion that I could suggest to her.
Their assets, financial and otherwise was as follows:-
- They had a 2BHK flat in Chennai which they could now give out on rent as they were moving back to their native town in Tamil Nadu. The rent would be around 1.5 lacs per year.
- They had no PF but their 2 PPF accounts over the last 20 years was having a total of 55 lacs.
- All their other assets were in debt instruments and the total amount was to the tune of 70 lacs or so.
- They had no investments in equity at all.
While the individual deployment of cash would be something they have to be comfortable with, there are several financial options possible.
- They can potentially sell their apartment and bolster the retirement corpus. However, as it is possible that the apartment may appreciate in value and the fact that the rental income is inflation adjusted, I did not recommend this.
- Assuming they needed 4.5 lacs every year adjusted for inflation (after the rent ), the best way will be to withdraw it from the PPF every year. Right now the interest will be more than 4 lacs per year and they can continue to withdraw for more than 15 years till the amount in both the accounts get exhausted.
- As they are uncomfortable with equity, they can put all the other 70 lacs in the debt funds. In 15 years even at a very low interest rate it will become about 1.8 to 2 crores. This can be deployed properly to get by for the next 15 years or so.
- If they are willing to take some risks then part of this 70 lacs can be put into Balanced funds in the hope of greater growth.
- Under current tax rules they will not really have to pay any taxes on the utilization of 6 lacs per year.
As expected, the lady wanted to go with the debt option and like all Indian parents, had the thought of leaving the apartment to their son. Of course, if they live beyond 85 or so the plan may need to be tweaked a little.
I hope this will be useful for people who may be near retirement and are feeling constrained by the fact that they do not have the kind of resources that financial planners and bloggers seem to suggest they should have. There is no problem if you have a lot of course – but if you do not then look to deploy what you have intelligently and you will probably get by quite well.