Personal finance expert Hemant Rustagi of Wiseinvest Advisors discussed about ways of earning regular income post retirement.
Below is the verbatim transcript of Rustagi's interview with CNBC-TV18.
Q: Retirement is a long drawn process for investors and generating a regular income on a consistent basis after retirement is equally challenging. What are the options for retiree to generate regular income?
A: It is quite challenging to generate regular income on consistent basis and fortunately there are number of options that are available for the retirees to generate regular income. Before discussing about these options I would like to briefly touch upon the strategy to decide the right product mix.
First, every retired person must assess the need for regular income carefully. Second, the retirees who get pension should consider the amount and adjust the requirement accordingly. Third, it is very important to consider increase in the expenses on account of inflation over a period of time.
All these factors, this entire process helps a retiree to ascertain as to what kind of return he or she needs to generate on the portfolio for example a retiree who has a corpus of Rs 50 lakh and assuming that his monthly requirement is around Rs 30,000, which is Rs 3.6 lakh per annum. He needs to just generate return of around 7 percent, which looks easy.
However, the picture changes completely the moment inflation is in. If I assume inflation at the rate of 7 percent then after ten years his monthly requirement will increase from Rs 30,000 to Rs 60,000, which is Rs 7.2 lakh per annum, which means that he will have to generate a return of more than 14 percent, which is very difficult if not impossible.
So, if he investment the money, which most of the retirees do in fixed interest rate bearing securities from the beginning, he is going to struggle after few years to keep pace with inflation. Therefore, the portfolio has to be a mix of fixed interest bearing securities as well as the market linked investment options offered by the mutual funds.
Talking about some of the options that help retiree in generating regular income and to begin with, there are post office monthly income scheme; these are currently offering return of 8.5 percent, the interest is paid on monthly basis. The maximum money that can be invested in a single account is Rs 4.5 lakh but jointly it can be up to Rs 9 lakh.
The second option is senior citizen saving scheme; currently the interest, which is being offered is 9.3 percent, which is paid on a quarterly basis and the maximum money that can be invested in single account is Rs 15 lakh but if husband and wife both are above 60 year of age, can have two separate account and invest Rs 15 lakh each, which is Rs 30 lakh in all.
The third option is bank fixed deposit; in this there is an option to get interest on monthly basis. The interest, which is offered is fixed but varies depending on what the interest rate scenario is at that point in time.
The fourth option is monthly income plan or mutual funds; these are market linked products, these are debt hybrid products wherein 75-80 percent of the money is invested in debt and the rest in equity. These have the option to give better return than other traditional options but the returns can be erratic too. Therefore, one has to be careful in terms of how much exposure one has to this.
The Union Budget 2013 has proposed dividend distribution tax in these funds, has been increased from 12.5 percent to 25 percent, which to my mind makes the dividend option unattractive to most people. However, as I mentioned earlier the market linked product has to be there in the portfolio. This product can be used or equity oriented balance fund also can be utilised in this portfolio to get capital appreciation over a period of time.
Apart from that there is an option for non-convertible debentures; these offer interest on monthly-quarterly-half yearly and yearly basis and there are also tax-free interest bonds, which generally pay interest on yearly basis. So, there are quite a number of options that are available but the key factor is to keep an eye on the need for regular income and also the future requirement on account of inflation. So, if one has a mix of these two kinds of products. I think retirees can achieve their goals.
Caller Q: I have taken seven insurance products. One in Jeevan Anand, which started in 2003 and premium is Rs 5,600, the sum assured is Rs 3 lakh. I have taken money back policy in 2005 and the sum assured is Rs 1 lakh. Third product is LIC Bima Gold, which has started in 2004 with tenure of 20 years and annual premium is roughly around Rs 11,000 and sum assured is Rs 5 lakh.
I have also taken Standard Life Insurance product, a Unit Linked Young Star, started in 2007, the tenure is 20 years and annual premium is Rs 20,000 sum assured is Rs 5 lakh. Another is HDFC ERGO Home Suraksha Plus started in 2012 for five years, yearly premium is Rs 16,000.
One I have taken Kotak Assured Income Plan that is just started in 2013, the insurance premium is Rs 97,000 per annum.
A: Many investors make the mistake – when we talk about buying insurance, it is not about having the number of policies but it is about having the right quantum of insurance. That is why I have always recommended that one should look at insurance only from the risk point of view and should ideally go for term plans and keep the investment and insurance separately and look at options like mutual fund, which can give him better returns.
He has a number of policies and if he totals that, I do not think even after that he will have adequate risk cover. I think he needs to go back and relook at his insurance portfolio.
First, I would recommend that he should go for a term plan to make sure that he has adequate risk cover. Second, like I mentioned he has number of policies, he needs to reduce that over a period of time looking at what is the surrender value of some of them and then try and get rid of some of them.
He also mentioned about his strategy for creating a retirement corpus, that will depend on the kind of time horizon he has and what is the target.
I will just try to help him out making some assumptions on the basis of information that he has given. His current income is around Rs 85,000. So, if I assume that his monthly expense is around Rs 40,000 and he is going to retire after 12 years, considering inflation at the rate of 7 percent, to maintain the same lifestyle, he will need the monthly income of Rs 90,000, which means that he will need a corpus of around Rs 1.3 crore to – if I am assuming a return of around 8 percent at that point of time.
To get to that, he needs to invest Rs 45,000 per month assuming a return of 11 percent, which I believe he cannot do right now. However, maybe this amount will go down further if we consider his provident fund or other investments that he has. So, he needs to look at that and then build a portfolio of a balanced fund and an equity fund and then continue this process over a period of time. I think the same thing he needs to do for his child education also.
I will recommend some of the funds for him, he can look at HDFC Prudence Fund, ICICI Prudential Focused Bluechip Fund and Reliance Equity Opportunity Fund, these are some of the funds that he can look at. As I mentioned, the key is invest on a monthly basis and continue this process over a period of time and reduce the number of insurance policies, that premium can be utilised here to put to better use.