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Case Study: Financial Planning for Retirees

"Is Rs. 1.50 crore enough to meet my life

expenses?"

Often, as individuals, we believe that our finances

are under control, but the truth is it may be just an
illusion.

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. Please note, he already had a
financial plan created for him by another financial
planning firm, and wanted to create another
financial plan for him so he could see how to
proceed.

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uetails were as follows:

Name: Mr. Retired (changed to

protect privacy)
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

On the whole, this situation to Mr. Retired seemed

absolutely okay. "A corpus of Rs 1.50 crore should
be enough to meet my life¶s expenses"
But unfortunately that was not the case.
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 pre tax 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 Savings Schemes

When an individual looks at safety and
guaranteed return, small savings are the first
that any financial planner looks at. However,
 noting that he was an NRI, this option too was
not available to do his planning.

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2. -ank / Corporate FDs
Yes , we did explore this option too, noting
that the required rate of return is 11.50% p.a.
But, presently as bank Fus are offering only
between 7.00% and 8.50% for the 1 - 2 year
tenure for senior citizens, this option too was
ruled out.
Talking about corporate Fus - 1 year corporate
Fu rates were offering interest rates between
7.00% (these are the well known companies
including housing finance companies - where
the risk is much lower comparatively) and
11.25% (these companies are much more
risky and risk of default and losing the capital
invested is greatly increased) - all pre tax
rates.

So, this option was ruled out as well.

3. 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 pre tax.

 

 


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So, clearly, from a rate of return point of view, we

were in a fix. And there was yet another reason why
the corpus would not have been enough...

Reason No. 2:
INFLATION

To put it simply, inflation creeps into what you eat

and how much you eat.
Mr. Retired needs Rs. 1 lakh per month (i.e. Rs. 12
lakhs p.a.) post tax  $#. That¶s 11.50% return pre
tax. 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
Annual Annual Pre tax
Income
Income Income rate
(Post
(Post tax) (Pre tax) of
tax)
in Rs Rs return
in Rs
Income 1,00,000 12,00,000 17,15,000 11.50%
required
today
Income 1,40,000 16,80,000 24,00,000 16.00%
required
in 5
years
Income 1,96,000 23,50,000 33,60,000 22.40%
required
in 10
years
Income 2,76,000 33,12,000 47,32,000 31.50%
required
in 15
years

*Figures are approximate