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.
So, what was his main financial planning objective? - To invest his corpus of Rs1.50 crore, so as to
meet his expenses of Rs 1 lakh per month (i.e. Rs. 12 lakh per annum) on an ongoing basis.
Another noteworthy point was he had a secondary corpus of Rs 50 lakh which he preferred not to
use for the plan
Details 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 lifes 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 wasnt 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.
Small savings schemes such as PPF, Post Office Monthly Income Schemes, Senior
Citizen Savings Scheme - are off-limits for NRIs.
2. Bank / 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 FDs 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 FDs - 1 year corporate FD 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 hes 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.
These are schemes wherein the investor invests his money as a lumpsum / regular
premiums today and starts receiving premium payments immediately, going on for a
specified term period or for life, as opted.

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 today. Thats 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.
Heres a snapshot:

Monthly Income
(Post tax)
in Rs

Annual Income Annual Income

(Post tax)
in Rs

(Pre tax)
Rs

Pre tax
rate
of return

Income required today

1,00,000

12,00,000

17,15,000

11.50%

Income required in 5 years

1,40,000

16,80,000

24,00,000

16.00%

Income required in 10 years

1,96,000

23,50,000

33,60,000

22.40%

Income required in 15 years

2,76,000

33,12,000

47,32,000

31.50%

*Figures are approximate

And all the while "his investible corpus remains the same i.e. Rs. 1.50 crore.