My father, aged 51, currently has no investments. He owns two properties and has one ongoing loan of Rs 20 lakhs. He has his money saved in the Provident Fund. His annual income is Rs 10 lakhs. Recently, a bank representative proposed a scheme whereby he would need to invest Rs 2 lakhs per year for the next 10 years. In return, he would receive Rs 1.61 lakhs annually for the rest of his life, with the provision for the same benefit to be extended to my mother after him.
Given this new investment opportunity, what is the best strategy for my father to plan his investments going forward?
Name withheld
Reply and investment advice by Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance
Ensuring a secure retirement is a fundamental component of effective financial planning. In India, the standard retirement age is 60 years, prompting individuals in their 40s to contemplate their future financial well-being. It is essential to thoughtfully map out your retirement strategy in order to enjoy a financially stable and comfortable life post-retirement.
According to the India Retirement Index Study (IRIS), 31% of urban Indians lack knowledge about the required retirement savings to maintain their current lifestyle. The latest IRIS 4.0 results emphasize the importance of beginning retirement planning at an early stage. In comparison to IRIS 3.0, there has been an increase in the percentage of Indians who believe that retirement planning should commence before the age of 35, rising from 38% to 44%. Furthermore, 93% of respondents over the age of 50 express regret for postponing their retirement planning.
Given your father’s current financial position, it’s essential to take a structured approach to his investments and liabilities. His existing loan of Rs 20 lakhs should be the first priority, especially if the interest rate is high. Paying down this loan faster can free up funds in the long term, reducing the overall interest paid and providing greater financial flexibility.
The bank-recommended scheme, which requires him to invest Rs 2 lakhs annually for 10 years in exchange for a fixed Rs 1.61 lakhs per year for life, seems appealing at first glance. However, such policies often offer low returns (around 3-4%) and don’t adjust for inflation, meaning that while they provide a predictable income, they lack growth potential and can erode purchasing power over time. These policies, including endowment and money-back schemes, are typically sold by banks because of the high commissions they yield but may not always be the best choice for the investor’s financial growth.
An alternative approach would be to invest Rs 2 lakhs per year in long-term mutual funds, such as index or flexi-cap funds, which have historically yielded around 12% returns. Over 10 years, this investment would potentially grow to approximately Rs 39.31 lakhs, significantly higher than the returns from the bank scheme.
After this 10-year period, your father could set up a Systematic Withdrawal Plan (SWP), withdrawing Rs 2 lakhs annually to create a steady income stream while allowing the remaining corpus to continue growing. Over 20 years of withdrawals, he could still retain a corpus of around Rs 2.35 crore due to the power of compounding. This SWP approach is also tax-efficient, as only the gains portion of each withdrawal is taxed, further optimizing the returns.
In summary, focusing on clearing the loan, avoiding low-return policies, and leveraging mutual funds for higher, inflation-adjusted growth could provide both financial security and flexibility for your father’s future. This approach aligns better with long-term wealth creation and is well-suited to meet rising expenses, especially in retirement.
(Views expressed by the expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)