Fixing finances at fifty

How to ensure a financially secure retired life even if you miss planning early


Everyone dreams of retiring rich. But, it is easier said than done as it ultimately will depend on your financial planning and how early you started. You may have slogged through your job to get the higher increment and promotions. But, did you put the money to work wisely?

Medical expenses have soared over the past few years and a sudden illness can hit an individual hard, wiping off a sizeable chunk of the savings. Therefore, an adequate health insurance cover is the need of the hour.
If you are starting late, you might have to do a careful study of your income and expenses and make sure that a larger corpus is earmarked for investment each month.

Today, the awareness about starting financial planning early is high. However, many still do not see the need for systematic investment and financial planning till in the later stages of their life, when expenses like a child’s higher education or wedding come up.

Typically, you are at the peak of your career when you are around 50. In an ideal situation, you would have already accumulated a sizeable corpus in your investment basket. Perhaps, some of you just depended on the monthly provident fund contribution that the employer deducted from your account, hoping that it would generate enough in your kitty over time. But, given the way the costs are rising, it may be extremely inadequate to meet all the expenses. Then when you are nearing 50, the realisation strikes that the savings are just not enough and you start worrying about funding large expenses. More importantly, you will have to consider how you will maintain your lifestyle post retirement. The dreams of retiring rich vanish as reality strikes.

But, all is still not lost. Though financial planners advise starting early and staying invested over long periods of time, it is never too late. Where should you park your money? Should it be left in the savings bank account? Should you open fixed deposits with scheduled banks? Should you buy bonds? Should you buy stocks or invest in mutual funds? The financial maze is a lot more complex than you think it is.

“I would like to quote Misty Copeland,” said Abhinav Angirish, founder of Investonline. “'Know that you can start late, be uncertain, and still succeed.’ It is never too late to start; the big challenge is to have a mix to have a steady income while ensuring capital appreciation.”

If you are a conservative investor, you might be inclined towards saving money in bank accounts or opening fixed deposits. But, savings bank accounts typically offer an interest rate of 3.5 per cent to 4 per cent, which is taxable. If you consider the average inflation to rise at 3 per cent to 6 per cent rate, just parking your money in banks is not going to help you accomplish your dreams. Some people choose fixed deposits, which offer a higher interest rate. However, that is also taxable, and coupled with the annual rise in inflation, your returns will not be much. Remember that if you are starting late, you have a shorter time horizon to invest and build a corpus.

Currently, State Bank of India offers an interest rate of 5.75 per cent (for term deposits up to 45 days), 7 per cent (for a period of one year to less than two years) and 6.70 per cent for three years to less than five years deposits. HDFC Bank’s deposit rates top off at 7.40 per cent. Other banks, too, offer interest rates in a similar range. The Reserve Bank of India has already reduced its benchmark repo rate twice and the expectation is that there will be more rate cuts this year to jump-start a slowing economy. So, the interest rates that banks offer are likely to fall. Add to that the income tax you pay as per your tax slab and the inflation rate; your returns on bank deposits will look too little.

“We must not forget that inflation is the only factor that stays forever,” said Angirish. “Any income will be subject to inflation. So if you are not beating inflation, then inflation will beat your capital. Traditional instruments like bank fixed deposits have lost their sheen due to falling interest rates.”

That brings us to equity or mutual fund investments. Many people consider it as a risky option, particularly in the short-term. At 50, one would rather protect the money one already has. But, the risk can be minimised by judiciously investing in a basket of quality equity funds, mixing it with debt funds of varied durations.

Pune-based Vinayak, 80, started investing in equity and mutual funds in his late 50s. Patiently investing across a mix of mutual funds and a small equity portfolio of quality stocks, he was able to grow a decent retirement kitty. “Earlier, I was saving up for my own house. So, I started investing very late. Now, half of my savings is in blue-chip stocks, and the other half is in equity mutual funds. Over time, the value of both the investments has continued to grow, which gives me confidence to stay invested,” he said.

There are different types of mutual funds. Pure equity funds invest the entire corpus in stocks; balanced funds invest 60 per cent to 70 per cent in equity, and the rest could be in money market or debt funds that invest in corporate bonds or government securities. There are pure debt funds, too, where some invest only in shorter-duration papers, while others invest in longer-duration instruments. Liquid funds can also be a great alternative to bank deposits. They invest in very short-term instruments like G-Secs and treasury bills, where the risk is very low. These funds offer yields in the range of 7 per cent to 8 per cent and are more tax efficient than bank deposits. So the post-tax returns are better. Another advantage is that many fund houses offer instant redemption facility with no charge or penalty. So, experts say, instead of leaving a lot of money in bank accounts, a sizeable portion should be parked in a liquid fund.

“Though bank deposits are a favourite, debt funds score over fixed deposits in term of better liquidity, diversification of portfolio and most importantly post-tax, inflation adjusted (real) returns,” said financial planner Ankur Kulkarni.

Equity investments can give annual returns of 12-14 per cent; some small-cap and mid-cap funds have also given more than 20 per cent returns in bull markets. With returns compounded each year, you will accumulate a respectable surplus, even though you have started late. Therefore, wealth managers say, equity investments should be an integral part of one’s portfolio. “While one might consider equity as being risky at 50, it becomes essential to add equity to deliver a decent corpus. Mixing it with debt can reduce the risks,” said Vidya Bala, head of mutual funds research at FundsIndia.

The other portion of the investment could be in fixed income assets like debt funds, company deposits or bank fixed deposits, which provide stable and regular returns.

There are advantages of starting investments early. Given the long time that you have on your side, you could accumulate a huge corpus with lower investments. But, if a person is starting at 50, the investments would have to be considerably higher. “Just as an example, an investment of Rs5,000 a month for 30 years through a systematic investment plan can deliver about Rs1.75 crore (at 12 per cent return). To just get the same corpus within 10 years, Rs75,000 a month of savings in necessary,” said Bala.

So, if you are starting late, you might have to do a careful study of your income and expenses and make sure that a larger corpus is earmarked for investment each month. “If the rate of savings is not high, no amount of investing in top products will help,” said Bala.

India has a large working class population. While government employees do get a pension, there is no such social security available to their private sector counterparts, except the provident fund. Therefore, over the last few years, national pension system (NPS) started being promoted as a tool for retirement planning.

Under the NPS, funds are invested in a mix of equity, G-Secs and corporate bond funds. It gets additional tax exemptions under section 80CCD of the Income Tax Act. The government has also tried to make it more attractive by making the withdrawals tax free. However, one must be aware of longer lock-in periods and that only 60 per cent of the amount can be withdrawn on retirement, which is tax free, and the rest has to be invested in an annuity (pension) plan of any insurance company, which will be taxed as per your income tax slab. Also, premature withdrawals are restricted barring a few circumstances.

Currently, there are eight pension fund managers for the private sector and three for the public sector. Investors can choose a fund manager after carefully studying their track records over various cycles. Here, too, the earlier you start, the larger the corpus you will end up with. Also, given that the investments are a mix of equity and debt funds, the risk is lower than pure equity funds.

“It has emerged as a good savings alternative,” said Angirish. “But while it provides tax benefit—up to 60 per cent of corpus can be withdrawn at the age of 60 tax-free—the funds get locked. For example, if you have accumulated Rs50 lakh as corpus in NPS, 40 per cent, or Rs20 lakh, gets blocked because it has to be compulsorily invested in annuity, and annuity is taxable in the hands of investor.” He recommends building a corpus via mutual fund investments and then opting for a systematic withdrawal plan after retirement based on the needs at the time.

If one is looking at investment plus tax saving as an option, then equity-linked savings scheme (ELSS) funds could be a good option. ELSS investments also get tax exemptions under section 80C of the Income Tax Act, and they have a lower lock-in period of three years. As ELSS funds invest in equity, they tend to give better returns than NPS, where equity investments are capped. “NPS can help by reducing tax burden and investing in market-linked products. However, given that there is a limitation on equity exposure to this product, especially with age, it can be used only in addition to mutual funds,” said Bala.

It is fairly clear that investments in equity-linked instruments will help you garner a larger corpus. However, if you are still averse to risk, traditional instruments like public provident fund (PPF) or a national savings certificate (NSC), which are secure and low-risk products, could help you diversify your portfolio. Just like a provident fund, PPF is a government-backed instrument, with an interest rate that is fixed on a quarterly basis; currently its at 8 per cent. A PPF account matures after 15 years, and subsequently it can be renewed for a period of five years at a time. Investments in PPF as well as the interest earned are exempted from tax.

One could also look at government-backed small saving schemes like NSC, which will become more attractive in times when interest rates are declining. This is also a fixed income instrument like a PPF. It can be brought from a post office with a fixed maturity period of five years or ten years. While, there is no maximum limit on the purchase of NSC, under Section 80C of the Income Tax Act, exemption is given only up to Rs1.50 lakh. Interest rate on NSC is also set quarterly by the government, which is currently at 8 per cent.

Banks offer tax saving fixed deposits, where the deposit is locked for five years. However, the interest earned is taxable and if interest rates continue to decline, interest rates offered on these tax saver FDs will also come down.

If you are only going to invest in fixed income instruments, then the amount you will have to invest will significantly go up, given that the returns are not as high as equity returns. If, for instance, you start at 50 and are targeting a corpus of Rs1 crore at the age of 60 through a mix of equity and debt instruments, at 10 per cent average annual returns, you would have to invest around Rs49,000 per month. In contrast, if you are only investing in instruments like term deposits and PPF, then at an estimated 7 per cent annual returns, you would have to invest close to Rs58,000 per month to reach the same goal of Rs1 crore.

So, while you will still be able to build a decent corpus, had you started earlier, say at the age of 30, the money that you would have had to invest per month would have been far lower at Rs4,400 (a mix of equity and other instruments), or 08,200 (if investing only in fixed income). So, the emphasis should always be on starting early and planning wisely.

A person at 50 must also take into account several other critical factors. Medical expenses have soared over the past few years and a sudden illness can hit an individual hard, wiping off a sizeable chunk of the savings. Therefore, an adequate health insurance cover is the need of the hour and this is the first thing that you should opt for unless you already have. “It shields your hard earned savings getting spent for your medical emergencies. In the absence of adequate health insurance, in case of any hospitalisation all the savings and investments may get wiped out leaving the family in tough times for the rest of the life,” said Kulkarni.

Premiums on health insurance go up every year. Also, gone are the days when health insurance was equivalent to a simple mediclaim policy. There are plans targeting particular diseases like heart ailments or critical illness. There are also family plans, so that your entire family (primarily self, spouse and two children) are covered.

Another critical thing to consider is your liabilities. Over the years, one takes several loans. Housing loan is often the biggest liability. You may have also bought things like cars, two-wheelers and consumer durables on loan. Then there is the credit card debt as well.

As you head closer to your retirement, you must pay back all your debts. As a thumb rule, you should try to make the full payment of credit cards each month on time. Not only is there a late payment fee, the interest charged is high, ranging from around 2 per cent a month to as high as 3.50 per cent. “Post-retirement, you would be looking for steady income. Hence, if you have outstanding debt, the interest outgo will be more than interest earned. This effectively defeats the purpose of investment,” said Angirish.

You might also want to look at converting some of your physical assets, like that second home, for instance, into financial assets, which will make things much more manageable after you retire.

Once you have built a corpus, you plan and use it with care in your post retirement years. One avenue could be the Pradhan Mantri Vaya Vandana Yojana, which is a pension scheme by the government for senior citizens. The minimum age of subscription to this policy is 60, and the policy term is ten years. You will get a pension of 8 per cent for ten years. Another option is mixing post office senior citizens’ scheme and senior citizens' bank deposits with low-risk liquid funds, which will help meet any emergency needs. At the same time, some savings could remain in equity funds, which will provide the long-term growth.

“There are a lot of people who knowingly or unknowingly delay retirement planning, which can hurt them significantly in their post retirement life,” said Kulkarni. “But, it is better late than never.”