I am currently 68 years old and possess a sum of 30 lakhs invested in fixed deposits. Additionally, I need to allocate a monthly budget of Rs 7,000 to Rs 10,000 for renting a place to live. Could you provide guidance on effectively managing my savings to cover my expenses for the duration of my life?
Sincerely, James Lawrence
Response by Raj Khosla, Founder and Managing Director of MyMoneyMantra.com:
To begin, let's consider a scenario where an individual aged 68 holds a fixed deposit of Rs 30 lakhs. This deposit should ideally generate consistent monthly returns to cover various expenses, including rent and living costs. The primary aspects to focus on include:
Consistent Monthly Returns: Since the individual's financial sustenance relies on the generated income, it's crucial for the returns to be deposited regularly. This ensures that monthly expenses can be anticipated and planned for in advance.
Preservation of Capital: For a senior citizen who relies entirely on the generated income, ensuring the safety of the invested principal takes precedence. The principal sum must not be subjected to any risk in pursuit of higher returns.
Emergency Principal Withdrawal Capability: Given the potential for medical or personal emergencies at this stage of life, there exists a need to withdraw an amount exceeding the regular monthly income on short notice. In such situations, it's vital that the senior citizen has the flexibility to access the required funds promptly.
Furthermore, the senior individual must acknowledge the challenge of inflation. While the costs of rent and essential expenses are likely to rise in the future, the returns on investments might not see an equivalent increase. Consequently, the senior citizen should strive to save as much as feasible from their monthly income.
Several financial instruments, such as annuities, monthly income plans, and fixed deposits, address the aforementioned needs. Among these options, fixed deposits and monthly income plan mutual funds are particularly well-suited due to their comprehensive nature.
Diversification is key for the consumer's investment portfolio, involving allocation across bank fixed deposits, corporate fixed deposits, and a Monthly Income Plan mutual fund. Opting for a bank fixed deposit assures a consistent monthly interest payout on a predetermined date; the individual can select a bank offering the most competitive interest rate. Presently, banks extend interest rates of up to 8.3% per annum for fixed deposits designated for senior citizens. On the other hand, corporate fixed deposits may yield higher interest rates compared to banks, though the safety of capital poses a potential risk with smaller corporate entities. Therefore, it becomes vital to select a reputable corporation to secure a slightly elevated interest rate.
The third avenue involves investing in a Monthly Income Plan (MIP), where regular monthly income is received on a fixed date. This plan also offers a superior rate of return due to a portion of the investment being allocated to equities.
Constructing a well-rounded portfolio involves allocating Rs 15 lakh to a bank fixed deposit to secure a steady income stream, adequately covering the monthly house rental. At an interest rate of 8.3%, this deposit would yield a monthly income of Rs 10,375, fulfilling the rental obligations. An additional Rs 10 lakh could be channeled into a Monthly Income Plan (MIP) to attain regular income for day-to-day expenses. Lastly, the remaining Rs 5 lakh could be invested in a corporate fixed deposit with a monthly payout option, capitalizing on a higher interest rate.
Furthermore, here are supplementary guidelines for effectively managing your savings throughout your lifetime:
Adhere to a Realistic Budget: Maintaining a budget that aligns with your financial means is of utmost significance, particularly for those aiming to enjoy a comfortable retirement. Ensure that your expenses do not surpass your earnings.
Make Astute Investment Decisions: Direct your savings towards assets with growth potential, ensuring alignment with your risk tolerance.
Periodically Realign Your Portfolio: As you age, consider recalibrating your investment portfolio to adopt a more conservative approach. This measure can safeguard your savings against market fluctuations.
Regularly Assess Your Financial Strategy: Given that your financial circumstances will evolve, it's crucial to routinely review your financial plan.
