I AM a 46-year-old man working in a private sector manufacturing firm, which gets me a salary of Rs 8 lakh per annum. I plan to retire in 8-10 years, and don't foresee a major increase in my income. Till now, I haven't made any retirement savings as such, but have been putting in Rs 50,000 in PPF for the last 20 years. Besides, I have around Rs 1 lakh in savings account, Rs 5 lakh in bank fixed deposits, about Rs 50,000 in shares and equity funds.
I don't have any liabilities in terms of any loan, and I have sufficient funds to meet my only son's higher education. Will these savings take care of my retirement if I continue saving Rs 50,000 per year? If not, please suggest an appropriate savings plan.

- Bhaskar Varma

Better late than never. It's good that you have started thinking about how to go about the years after you retire. With the amount of savings you are comfortable making, the time you have to invest before you retire, and the corpus you require for a comfortable living thereafter, your options are limited.

What I have tried to do here is paint you a picture of what you would earn each month after your retirement, allowing for your child's advanced education if you were to carry on in the same vein, and then juxtapose what I think you should be doing with your portfolio and future earnings in order to allow for some considered aggression in the way that your money grows.
So let's us start by assuming that you retire nine years from now. Your objective is to have a healthy inflow of money for your regular expenses after retirement till the age of 80. To meet this objective, you can invest Rs 50,000 per year. You haven't mentioned when you would have to incur higher education costs. We'll presume it is three years from now, and that the estimated cost of your son's education will be Rs 10 lakh.

The Game Plan

The current net worth of your investments stands at around Rs 3,438,000, derived after adding PPF balance as on date of Rs 2,788,227 (based on a 9 per cent compounded annual rate of return); savings bank balance of Rs 100,000; fixed deposits worth Rs 500,000; and equity funds of Rs 50,000.

Based on these assumptions, if you are able to generate a return of 8 per cent as against inflation of 6 per cent, you would be able to provide for the inflated value of your child's education of Rs 11.9 lakh and then be able to sustain a monthly expenditure of Rs 13,500 (present value) after retirement, up to the age of 80 (See 'Cash Flows Till Retirement Age'). The table shows that you would have a corpus of Rs 56.3 lakh at the time of your retirement.

As stated earlier, if you strive to earn 8 per cent return even after retirement, this corpus would be adequate to sustain a monthly expenditure of Rs 13,500 (present value) up to the age of 80.

Make Your Money Work

Now, we will deal with how you can get a rate of return that is greater than 8 per cent on your investments. Investment avenues such as PPF and Employees Provident Fund will be inadequate in the long term. It must be noted that inflation at 7.5 per cent, as is being experienced today, would wipe out real earnings from the traditional avenues in which you have been investing.

It is therefore suggested that you increase asset allocation towards equity in your portfolio by breaking your fixed deposits. This is a comparatively risky strategy, but is suggested considering the limited options available.

It is also suggested that your annual savings of Rs 50,000 be invested in both equity and small saving schemes, some of which yield higher risk-free income as compared to fixed deposits.
We, therefore, suggested earlier that you break your fixed deposits. You could invest the Rs 5 lakh as follows:

Direct investment in equity stocks: Rs 150,000
Equity & sectoral funds: Rs 150,000
Small savings: Rs 200,000

Investing In Stocks

There are ample investment opportunities offered by stockmarkets for the prudent investor. Please understand that investing in stockmarkets, either directly or via equity mutual funds, is not always a recipe to earn large upsides. And the strategy is only for someone who is prepared to take some amount of risk. You also need to carefully research the company in which you are putting your money.

Prudent investors have almost always made the returns they expect in the long term. For instance, the primary market has been vibrant in this past year with many strong IPO issues. Some of the IPOs in recent times have delivered an average return as high as 50-60 per cent in the near and short term.

Secondary markets offer opportunities with sectoral outperformers and fundamentally sound picks. These are solid companies that are already listed. There are also arbitrage opportunities in buybacks and open offers announced by companies from time to time.

And finally, there are opportunities in investing in dividend-yielding stocks or those with a good track record of paying high dividends. However, they normally come at high valuations and must always be looked at in conjunction with capital appreciation.

Mutual Funds

Mutual funds offer a hands-off approach to investing in stocks. Always maintain diversity of funds, and be sure about the merit of the asset management companies that manage them.

These days, asset management companies have specific funds that offer a host of investment opportunities based on the capital of the company, sensex indicators, sectoral stocks or dividend yielding stocks.

It is, however, essential that you always seek the advice of wealth management professionals before investing. This is because you need to ensure that you don't overexpose yourself in any specific sector or asset company.

Small Savings Schemes

Despite the presence of alternate investment options, small savings schemes continue to be the preferred choice for a sizeable chunk of the investing population. The high safety levels, coupled with the attractive returns, make small savings schemes a must-have proposition for most investors.

Putting together a diversified portfolio that reduces your risk still works far more efficiently than the investment avenues you have currently adopted (See 'Your Investment Pie').

Assuming we even consider a more realistic return of 19-20 per cent based on the diversified portfolio mentioned, the rate of return that your portfolio would generate is up 12 per cent per annum. In other words, your money will work more efficiently for you, getting you an additional earning of Rs 76,500 annualised in absolute terms.

This will result in you earning Rs 90,000 per month from a corpus of Rs 1.52 crore which you will have on your retirement, after considering expenses that you will incur on your child's higher education.

You must also think of getting an insurance plan to protect yourself against life risks to the extent of half the planned corpus you hope to have at the time of retirement.

Since you already have a healthy corpus, a pure term policy cover of one-third your expected corpus should suffice. A pure term policy of Rs 50 lakh coverage for 10 years would cost you approximately Rs 23,000 per annum.

You may also wish to protect yourself from increased medical expenses, a reality as one gets older. A mediclaim cover would cost you under approximately Rs 5,000 per annum for a Rs 4 lakh cover. The advantage of such a cover is that you don't touch your corpus for unforeseen medical expenses, and instead have insurance companies paying your bills directly through a cashless transaction.

The aforementioned recommendations take into account the information provided by you. However, please consult a reputed wealth management consultant before taking any decision concerning your portfolio.

Vasu Krishnamurthy is the director of Allegro Capital Advisors, headquartered in Bangalore.. He can be reached at pf@bworldmail.com.