Can a 73-year-old retired person rely on equity investments for retirement savings?

My question is to Mr. K. Ramalingam, MBA, CFP, Chief Financial Planner. Sir, I read with interest your suggestions regarding financial planning. In most of the answers you suggest to invest in SIP and different mutual funds, even for the retirement savings. I am a 73 years old retired person with stable Government pension and I also invest in equities (current market value is about 19 L). I also have an active PPF account which I use for saving taxes. Let me present a few facts from my experience. In the mid nineties during Harshad Meta period, the stock market went to the roof. One of my friends had a few shares of Tata Steel whose share price then was Rs. 500. Then the market crashed and in the next 15 years Tata Steel share never reached the above value. The NAV of many mutual funds crashed to Rs. 2. To present a better balance sheet, many mutual funds were closed and new ones were started. Any body who had invested before the crash would not get any return in the next 15 years and those who invested after the crash would have considerably gained. Similar things had also happened in 2008. Bank fixed deposits also will not help since we can not be sure that inflation will be in check. If tomorrow, some combination of political parties win election promising very large freebies and they try to implement them, then inflation may become as large as in our neighbouring Pakistan where few days back it was 40%. Similar things happened in the erstwhile USSR after the breakup and for most of the people, the value of their lifelong savings reduced to almost zero. Hence one can not breath easily with few crores of saving in his old age. No amount of saving will ensure a stable old age. Now the share market is booming and all the predictions may be true. But life is uncertain. Fixed assets and gold are kings. Can you kindly comment?

Ans: Your insights into the volatile nature of financial markets are spot on. The experiences of the 1990s and 2008 have indeed left many investors cautious. It’s commendable that at 73, you have a stable government pension, equity investments, and an active PPF account. Your financial prudence is evident.

Your Concerns Are Valid
Your concerns about inflation, political instability, and the erosion of savings are entirely legitimate. The unpredictability of the financial landscape makes retirement planning a complex challenge.

Balancing Risk and Reward
While I often recommend SIPs and mutual funds for long-term wealth creation, I understand that this strategy might not be suitable for everyone, especially those nearing or in retirement. Your preference for fixed assets and gold is understandable given your risk aversion.

Here's a balanced perspective:

Diversification is Key: While you've mentioned equities, PPF, and potentially fixed assets and gold, consider diversifying further. This could include other debt instruments like senior citizen bonds or fixed deposits.
Regular Income: Given your age, generating regular income is crucial. Your pension is a good start, but consider exploring annuity options to supplement your income.
Emergency Fund: Having a readily accessible cash reserve for unexpected expenses is essential.
Healthcare: As you age, healthcare costs can rise significantly. Ensure you have adequate health insurance coverage.
Estate Planning: Consider creating a will and other necessary legal documents to protect your assets and ensure a smooth transition for your heirs.

Your experiences highlight the inherent risks associated with equity investments. The stock market is indeed volatile, and past crashes like the ones in the mid-nineties and 2008 have underscored this volatility.

It's important to remember that these events were exceptional and not the norm. While they caused significant losses for many investors, the stock market has historically delivered positive returns over the long term.

Your friend's experience with Tata Steel is a prime example of how individual stock performance can vary widely. However, a diversified portfolio, which includes investments across different sectors and companies, can help mitigate such risks.

Mutual funds, too, have faced challenges, as evidenced by the NAV crashes you mentioned. However, it's crucial to distinguish between short-term fluctuations and long-term performance. Over the long run, mutual funds have generally outperformed other investment options.

While your caution is understandable, it's essential to consider the broader picture. A balanced approach that includes a mix of investments, including equities, debt, and potentially other asset classes like gold, can help manage risk while pursuing growth.

A Cautious Approach
Your approach of emphasizing stability through fixed assets and gold is prudent in the current economic climate. It’s essential to find a balance that aligns with your risk tolerance, income needs, and long-term goals.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in

Asked on - Aug 04, 2024 | Answered on Aug 04, 2024

Thankyou for your nice and prompt reply. In mid nineties the fall in share prices was across the board. Historically such crashes occur at regular intervals. Yes your suggestions are quite good and I keep a sizable amount of my savings (around 30 L ) for emergencies. I am a Insurance septic and never took any insurance. I had purchased housing plots during my job and over the years they have considerably appreciated. In conclusion your suggestions are very nice and I am thankful for that.

Ans: You're welcome! If you have any more questions or need further assistance, feel free to ask. Best wishes on your financial journey!

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Dear Mr. Arora,

Thank you for sharing the details of your financial situation. Your current setup reflects a solid foundation with both you and your wife earning well, alongside having substantial assets and insurance coverage. Your long-term goals and aspirations indicate a keen interest in securing a stable and prosperous future for your family. I understand the importance of making informed and strategic financial decisions, especially when planning for an early retirement. Let's dive into a detailed analysis and recommendations tailored to your needs.

Income and Expenses Analysis
Income:

Your combined annual income stands at Rs 38 LPA (Rs 25 LPA for you and Rs 13 LPA for your wife).

Passive income is Rs 30,000 per month.

Expenses:

Monthly household expenses are Rs 70,000.

EMI payments for the newly procured flat amount to Rs 60,000 per month.

Annual family tour expenses are Rs 50,000.

This analysis indicates a strong cash flow with significant income and manageable expenses. The goal is to optimize your investments and savings to meet your future goals.

Insurance and Protection
You have term insurance of Rs 2 crore for yourself and Rs 1 crore for your wife. This is a prudent measure ensuring financial protection for your family in case of any unforeseen events. It's crucial to review your coverage periodically to ensure it aligns with your current financial responsibilities and liabilities.

Asset Allocation
Current Assets:

Flat worth Rs 70 lakh.

New flat worth Rs 1.5 crore.

Small piece of land in the village.

Investments:

ULIP-SIP of Rs 25,000 per month, with 10 years remaining.

Mutual funds/equity investments of Rs 5 lakh.

Fixed deposits of Rs 25 lakh.

Passive income of Rs 30,000 per month.

You have a diversified asset base, including real estate, ULIPs, mutual funds, equity, and fixed deposits. However, for better returns and liquidity, focusing on mutual funds and equities over the long term can be more beneficial.

Goals and Objectives
Your financial goals include:

Investing Rs 50 lakh each in mutual funds and shares.

Increasing your fixed deposits from Rs 25 lakh to Rs 1 crore over the next 12-15 years.

Acquiring 1 kg of gold.

Maintaining emergency liquid cash of Rs 15-20 lakh at retirement.

Planning for financial retirement at 55.

Investment Strategies
Mutual Funds and Equities
Investing Rs 50 lakh each in mutual funds and equities is a sound strategy for wealth accumulation. Here are some recommendations:

Diversified Equity Funds: Actively managed funds can outperform index funds by leveraging market opportunities. Investing through a Certified Financial Planner (CFP) ensures professional management and alignment with your risk profile.

Blue-chip Stocks: Investing in shares of well-established companies with a history of stable returns and growth potential.

Sector Funds: Allocating a portion to sectors expected to grow, such as technology or healthcare, can yield higher returns.

Fixed Deposits
Increasing your fixed deposits to Rs 1 crore over the next 12-15 years ensures stability and security. Consider the following:

Laddering Strategy: Staggering your fixed deposit investments over different maturities to manage interest rate fluctuations and provide periodic liquidity.

High-Interest Accounts: Opt for banks or financial institutions offering higher interest rates for long-term deposits.

Gold Investment
Acquiring 1 kg of gold is a long-term goal. Gold can act as a hedge against inflation and currency fluctuations. You can achieve this through:

Systematic Investment Plan (SIP): Regularly investing small amounts in gold ETFs or sovereign gold bonds.

Physical Gold: Purchasing gold coins or bars periodically.

Emergency Fund
Maintaining an emergency fund of Rs 15-20 lakh at retirement is crucial. This fund should be easily accessible and kept in liquid instruments such as:

Savings Accounts: High-interest savings accounts offer liquidity and some returns.

Liquid Mutual Funds: These funds provide higher returns than savings accounts while maintaining liquidity.

ULIP and Insurance Policies
You mentioned paying ULIP-SIP for the last five years with ten years remaining. ULIPs often have higher charges and lower returns compared to mutual funds. Consider the following options:

Review ULIP Performance: Assess the performance and charges of your ULIP. If the returns are not satisfactory, it might be beneficial to surrender the policy and reinvest in mutual funds.

Term Insurance: Ensure your term insurance coverage is adequate and consider increasing it if needed. Avoid mixing insurance and investment; keep them separate for better returns and protection.

Retirement Planning
Planning for retirement at 55 requires a strategic approach to ensure financial independence and stability. Here are some key steps:

Retirement Corpus Calculation: Estimate the amount needed to sustain your lifestyle post-retirement. Consider factors like inflation, life expectancy, and medical expenses.

Regular Savings and Investments: Continue regular investments in mutual funds, equities, and fixed deposits. Increasing your SIP amounts periodically can help grow your retirement corpus.

Review and Rebalance Portfolio: Periodically review your investment portfolio with a CFP to ensure it aligns with your retirement goals and risk appetite.

Passive Income Enhancement
Your current passive income of Rs 30,000 per month is a great start. Enhancing passive income streams can provide additional security. Consider the following:

Dividend Yielding Stocks: Invest in companies with a history of paying consistent dividends.

Rental Income: If possible, rent out your properties for additional income.

Interest Income: Utilize interest from fixed deposits and bonds.

Comprehensive Financial Review
It's essential to conduct a comprehensive financial review periodically. This includes:

Assessing Goals: Ensure your financial goals remain relevant and adjust them as needed.

Tracking Progress: Monitor the performance of your investments and savings.

Adjusting Strategies: Make necessary adjustments to your investment strategies based on market conditions and personal circumstances.

Tax Planning
Effective tax planning is crucial to maximize your savings. Consider the following:

Tax-Saving Investments: Invest in tax-saving instruments under Section 80C, such as ELSS mutual funds, PPF, and NSC.

Health Insurance: Premiums paid for health insurance are eligible for deduction under Section 80D.

Tax Harvesting: Utilize tax harvesting strategies to minimize capital gains tax on your investments.

I commend your proactive approach to financial planning. You have a clear vision for your future and have already made significant strides in securing your family's financial well-being. Your disciplined savings and investments demonstrate a strong commitment to your goals.

Planning for early retirement and ensuring a comfortable lifestyle for your family is a significant undertaking. It's understandable to seek the best possible strategies to achieve these objectives. I appreciate the trust you place in seeking professional guidance.

Final Insights
Your financial journey is on a solid path, and with strategic planning and disciplined execution, you can achieve your goals. Regularly reviewing your financial plan with a Certified Financial Planner will ensure you stay on track and adapt to any changes in your circumstances. Focus on optimizing your investments in mutual funds and equities, enhancing your passive income streams, and maintaining a robust emergency fund. With a comprehensive approach, you can secure a prosperous future for yourself and your family.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in