SEBI registered fee-only investment advisor Sriram Jayaram discusses how senior citizens should manage their money holistically in 2022.
About the author: Sriram Jayaraman is a SEBI registered fee-only Investment adviser. After 27 years of working in large IT companies in India, he achieved financial independence and retired early to become a fee-only advisor. You can contact Sriram via his website arthagyan.com.
As a retiree and senior citizen, you have worked for thirty to forty years. Whichever field you have worked in, you have given your 100%. You may have taken up lots of work stress together with stress at home. You have taken good care of your parents and your children. You have fulfilled your responsibilities towards them. It is now your time to take it easy.
You have now reached a stage where you may need the physical and emotional support of your grown-up kids. However, you should still try to remain independent on your finances and not expect any support from others including your son(s) or daughter(s). Plan your future to remain emotionally, physically and financially fit.
Emotional fitness: As you age, you need to keep in touch with your old friends and relatives. The constant interaction with them will keep you in good mental health. This is the time to look for an activity to keep you engaged. You can also indulge in a hobby. Singing and playing a musical instrument is a good way to keep your mind engaged. Reading and solving puzzles are other good ways as well.
If you are in good health, you can do some travelling and explore new cities. If you like to work for an NGO and never had the time, this is the time to start. If you have worked in marketing, you can help your favourite charity organization chalk up a marketing strategy. If you have been an accountant, you can help your local organization with its accounting. If you are religious-minded, you can join a religious group and keep yourself occupied.
Physical fitness: Keeping yourself physically fit should become your priority. In your working days, the daily routine was dictated by your work. Now, your fitness routine should assume priority. Yoga and meditation combine exercise for the body and the mind. If you are in good health and always wanted to run or cycle, this is the time to indulge in it. You can join a running group and a cycling group. The group will motivate you to join group activities and not fall back from the group targets.
Financial Fitness: Now, we get into the subject of this article. You need to create a financial plan for yourself. The objective of the plan is to help you live your life with your own money, without requiring any support from your kids or relatives. You need to plan your investments such that your money outlives you. You may have received retirement benefits such as Provident fund, Gratuity etc. You may feel very rich and like to give monetary gifts to your loved ones. It is your hard-earned money and you have every right to do as you please with it.
However, you should not reach a situation a few years later when you require money from your son/daughter. Hence, it is prudent to first ensure that you have sufficient cash flows until your lifetime. If there is anything left, surely your loved ones will inherit it. It is in your best interest to resist the temptation to make a big gift from your retirement money.
Why is retirement planning very difficult? We do not know how long we will live. We do not know how expenses may increase in the future. There could be health-related expenses. If you require home care, then you may require to pay for home nursing. These expenses need to be estimated. Inflation is never linear. In the past, it has ranged anywhere between 3% to 12%. Despite these difficulties, you need to make an estimate and plan your finances. Having a plan is better than not having one.
The average life expectancy for India is 70.8 as per Worldlifeexpectancy. However, this is only the average. It hides the fact that a good number of people have lived beyond 90 years of age. A financial plan is meant to work not for the best case, it is created to work for the worst case. Hence a more appropriate life expectancy to be used for financial planning is 90. If your spouse is younger than you, then you need to plan your finances until the younger among you reaches 90 years of age.
Emergency fund: Keeping aside 6 to 12 months’ expenses is very important for everyone and this applies to you as a senior citizen as well. You should keep this in a joint savings account as liquidity is more important than interest or returns. Both you and your spouse should have access to operate the account in case of a need.
Health Insurance: As a senior citizen it is very important to have health insurance, as an expensive hospitalization can derail your finances. The insurance premiums will be on the higher side as insurance companies perceive a higher risk of hospitalization. If you do not have health insurance, it is important to take one now. While filling out the form, you should declare all your pre-existing conditions truthfully. You do not want to get a claim rejected in the future due to not declaring your current health conditions.
What are the recommended investments for senior citizens?
Senior citizen savings scheme: This is one of the best schemes from the government of India targeted at senior citizens. The interest rate is locked from the date of investment for a period of 5 years which is the tenure of the investment. The rate of interest is announced by the Finance ministry every quarter. The present interest rate is 7.4%, paid quarterly. If the interest rate increases in future, you cannot benefit as your interest rate is locked. If the interest rate goes down, you are not affected. The maximum investment is Rs. 15 lakhs per person. If you and your spouse are both over 60, then it is ideal to invest 15 lakhs each. Interest is taxable as per slab.
Pradhan Mantri Vaya Vandana Yojana: This is another good scheme from the government of India for senior citizens. You can opt for a monthly, quarterly, half-yearly or annual pension payment. The monthly pension is 7.4%, quarterly is 7.45%, the half-yearly is 7.52% and yearly is 7.66% The rate of interest is linked to the Senior citizen savings scheme. The maximum investment is Rs. 15 lakhs per person. The interest is locked for a period of 10 years which is the tenure of the investment. Read more: PM Vaya Vandana Yojana (2020) is now open: Key Features
GOI Floating rate bonds: This is the new bond introduced by the Government of India in place of the 7.75% GOI bonds. The interest rate is floating and will be 0.35% higher than the rates offered for NSC. As you are aware, NSC interest rates are fixed every quarter by the ministry of Finance. The tenure of the bond is 7 years with an interest rate reset every 6 months. Unlike the SCSS and PMVVY, the interest rate can change even after you have done your investment. There is no upper limit for investment. The interest is payable half-yearly. Read more: RBI Floating Rate Savings Bonds 2020: Who should buy?
The above 3 safe investment options are the most recommended for senior citizens. However, they are not tax-friendly. The interests paid need to be declared in the ITR and taxes paid at your slab. If you are using the old tax slabs, you can use the standard deduction of Rs. 50,000 as this is applicable for pensioners. If you are in a higher tax bracket and are looking for tax-friendly investment, then you could consider debt mutual funds. They have the advantage of indexation benefits for investments that have been held for over 3 years. For redemption, you can use the systematic withdrawal plan, once the investment has completed 3 years of holding.
You need to be aware of the risks involved in debt funds. If the fund holds corporate bonds and commercial papers, then it is exposed to credit risk. If the duration of the securities held is over 1 year, then it gets exposed to interest rate risk. Gilt funds are safe from credit risk as they only invest in Government securities, however, they are exposed to interest rate risk. This causes their NAV to fluctuate by a large margin. It could be safer to invest in short-duration funds with good exposure to government securities.
A 20% to 30% exposure to equity funds is recommended for senior citizens who have an understanding of the equity market and can withstand the risks associated with equity markets. This can help you to beat the inflation as the fixed income options may only give you zero or negative real returns post-tax.
The interest rates are getting lower by the day for fixed deposits and the safe investments that we have discussed. This has triggered a trend among senior citizens to chase high-interest yielding products. Why is this not a good thing? Let us consider the below cases:
Raju, aged 62 had invested 30% of his retirement savings in IL&FS Non-convertible Debentures in 2016. He was receiving a good interest payment of 9% which was higher than the interest on bank FDs and hence he was happy about his investment. However, in 2019 IL&FS defaulted on the interest payment. He is now facing uncertainty not knowing when he will receive his interest and the principal back from IL&FS.
Rohith, 65 had been keeping his retirement money in a PSU bank Fixed deposit. He was not happy with the rate of interest he was getting. He was hunting around for a bank that could offer him a higher rate of interest. He zeroed in on PMC bank which was offering him 2% higher interest compared to his PSU bank. He put his faith behind the 100-year-old institution with the trust that this bank is well managed. He moved 50% of his retirement funds to PMC bank in 2015. But in 2019, RBI placed restrictions on withdrawals from the bank. Now Rohith is facing uncertainty about what will happen to his money.
Roopa, 65 has been trading in stocks for the last 2 years after April 2020. She had made lots of money till July 2021. However, the tide has turned and now she is sitting on huge losses and has lost a part of her capital. You should never trade in stocks to keep yourself occupied. It can turn out to be a very expensive entertainment as Roopa has found out.
These cases are examples to show that you should never chase returns. When investing your hard-earned money, you should always give priority to the safety of the principal and be satisfied with a reasonable rate of return.
Let us consider the below examples to see what is the recommended investments for senior citizens:
Sundaram, 65 has retired as a professor from a government college. His home-maker wife Rekha is 62. Sundaram receives an inflation-indexed pension of Rs. 70,000 per month. His expenses are Rs. 55,000 per month and they live in their own flat. His retirement savings is Rs. 45 lakhs. He has never invested in mutual funds.
My recommendation to him is to keep it simple and invest 15 Lakhs in the Senior citizen savings scheme and 15 lakhs in PMVVY. In PMVVY, he can choose the yearly interest as the interest rate is 7.66% for this option. He can invest 10 lakhs in his wife’s name in either SCSS or PMVVY. The interest received by her is, however, to be clubbed in his income and tax needs to be paid accordingly. This investment is not tax-efficient as the interest from SCSS and PMVVY are taxable. The tax-efficient way is to invest in growth options of debt mutual funds.
Ramesh, 64 has retired from a government job and receives a pension of Rs. 5,000 per month. His home-maker wife is 60. Their savings is Rs. 35 lakhs. Their monthly expenses are Rs. 15,000. Ramesh is comparing the interest rate offered by SCSS with company fixed deposits, debt mutual funds and NCDs of companies. He is following a popular youtube channel. He has contacted the office of this youtube channel. They have told him to buy bonds of an NBFC which is yielding 10% interest per annum. Each bond has a face value of Rs. 10 Lakhs. He feels the 10% rate of interest offered by an NBFC is too good to miss out.
The Youtube channel is not a SEBI registered investment advisor. You should only listen to them for knowledge and not call them for investment advice! Beware of the NBFC bonds which they recommend. These are illiquid investments and they make a commission when you buy these investments are not for retail investors as the face value is Rs. 10 Lakhs. When you see the returns are high, you should understand that it also comes with a higher risk.
Summary: I recommend senior citizens invest in simple products that earn a reasonable return. Do not chase returns and end up losing your capital.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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