Chandrasekar (65) retired three years back. He wanted to review his financial position because of his changed needs and new priorities. He was also considering transfer of wealth to the next generation.
He and his wife Rama (61) live in Chennai. As a finance professional, he has good understanding of various products and the risks associated with such products. As with many of us, the Covid-19 pandemic has spurred him to be sensitive to unforeseen challenges.
His assets comprised financial assets and real estate. His total net worth was estimated to be ₹15 crore excluding self-occupied house in Chennai. He is physically active and reasonably healthy. His wife is ageing and is on regular medication for a long-term ailment.
Defined financial goals
Basis his changed priorities of increasing liquidity, seeking regular income and wishing to bequeath assets to his son and daughter, we helped him define his financial goals as below:
1. Set up a emergency fund to cover 12 months of living expenses in fixed deposits
2. A medical fund for a sum of ₹50 lakh with enough liquidity through staggered fixed deposits and liquid funds
3. Automate his charity needs with an endowment fund of ₹1 crore. Income earned from this endowment fund will be spent on the education needs of deserving students and families. This was made possible with a trust structure.
4. He was advised to use different structures to transfer his wealth over a period and prepare a will accordingly.
5. Towards ensuring a regular income from his assets for the family expenses, we advised him to segregate his expenses into 2-3 buckets. First one to cover his living costs, which also included support staff and emergency care expenses. He estimated the amount to be ₹75,000 per month. Second was to spend for his luxury needs (travel and appliance purchases), estimated at ₹5 lakh per annum. Third one would cover social needs such as meeting and gifting friends and family. He estimated this to be at ₹3 lakh.
He preferred a conservative approach for his own needs and requirements but wanted to allocate reasonable growth assets for his other needs such as charity, and transfer of wealth to children. . For self, he favoured fixed deposits and safe investment avenues though he might be paying higher taxes, with safety and liquidity being top criteria for choosing an investment avenue.
Review and recommendations
1. We advised Chandrasekar to reserve ₹9 lakh in FDs with auto renewal option in the bank closest to his residence, towards his Emergency Fund.
2. To create a medical fund of ₹25 lakh each for him and his wife, again in FDs in a staggered way.
3. His retirement living expenses were at ₹75,000 per month. Estimated inflation would be around 7 per cent and life expectancy for him and his wife was taken as 100. Post tax return from investment products was estimated at 6.5 per cent per annum. Though he was aware of the burden of taxes and the impact on returns, he wanted to ensure he had enough funds to manage his expenses in the safest possible way.
He was advised to reserve ₹3.84 crore and the basket of products were selected from Government Bonds to annuity plans. The product basket ensured that it required minimal management from him or his spouse.
4. To cover his living expenses fund, we advised him to retain approximately 50 per cent of the corpus to wealth fund for his needs. This was invested in a balanced portfolio with 50 per cent in index funds and 50 per cent in fixed income securities.
5. He wanted to withdraw ₹8 lakh every year for the next 20 years and the corpus needed for the same was ₹1.6 crore.
Any income received from this corpus could be used as per inflationary additions towards his needs or he had the option of transferring the excess to charity.
6. Charitable trust was created with identified beneficiaries and the charity automated with minimal human intervention.
7. Recommended a combination of will and private trust and other alternate options to transfer wealth to his children in case of any unfortunate event. Enough care has been taken to protect his wife’s interest in managing her lifestyle and expenses for her life time.
The pandemic has induced fear in senior citizens about handling money, health needs and wealth transfer.
This gentleman, with hands-on experience in various financial products, opened many doors with much clarity.
Here was one who went the extra mile to ensure personal stability, and well-being of those around him. Also, seeking the help of professionals adds value to what you want to accomplish.
The writer, founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI