While the financial market turmoil has taken its toll on all classes of investors. It has left many senior citizens even more vulnerable, as many of them depend on returns from their investments for regular income.
“What differentiates senior citizens from other investors is their need for regular withdrawals. On one hand, their income level is not high, and on the other, their expenses are almost equal to their earnings,” says chartered accountant and financial planner Zankhana Shah.
To deal with scenarios such as the one being witnessed by the market now, she recommends the creation of two distinct portfolios — income and growth. The income portfolio would ensure peace of mind for those who are risk-averse (as many senior citizens are) while the growth portfolio would provide for capital appreciation.
The income portfolio could comprise safe instruments such as bank fixed deposits, post office time deposits and 9% senior citizens savings scheme, which can generate regular income over a period of 5-7 years. The growth basket should consist purely of equities (stocks as well as mutual funds), to provide for capital appreciation.
Only the funds that would not be required in the next 5-7 years should be used to build the growth portfolio. By the time the cycle turns again, the value of portfolio would have increased considerably, thus cushioning the impact of another downturn in future.
PARK Financial Advisors director Swapnil Pawar feels that senior citizens should stay away from equities at the moment. He says that those without an income stream should try and park their money in a combination of FDs, FMPs and long-term gilts.
“The latter will help them reap benefits of the reducing interest rate scenario,” he explains. Senior citizens would do well to avoid putting their money in unregulated avenues such as chit funds and instruments that they do not understand like complicated capital protected or derivative products.
Financial position is key
The point to be noted here, say financial planners, is that the investment strategy would depend on the investor’s current financial position, income stream, risk-taking capacity and future needs, which means that there cannot be a one-size-fits-all asset allocation.
Though senior citizens are advised to invest in relatively ‘safer’ avenues such as debt, this need not be applicable to all. For instance, financial planner Amar Pandit’s clients did not want to invest in debt-oriented instruments at all. His income stream was robust, with close to Rs 2-3 lakh being earnings through rentals and other sources.
He was burdened with neither responsibilities nor loans. Besides, he was in the highest tax bracket, with no need for funds in the short term.
Avoid illiquid assets
You also need to make sure that your investment strategy has room for your liquidity needs as well. You may have a plethora of investments, but if most of them are illiquid, you could be left in a lurch during crunch situations.
Recounting his recent experience, retired private sector employee Vasant Padki (name changed) says: “I had locked-in my earnings from some assignments that I had taken up post-retirement in longer tenure fixed deposits. Just a few weeks later, there was a medical emergency in the family for which I needed around Rs 2 lakh. I had to break some high interest FDs to clear the hospital bills.” Therefore, it is essential to create a contingency fund capable of meeting, at least, five months’ expenses.
Don’t go overboard with insurance
Mr Padki’s experience also highlights the need for health insurance. A comprehensive health cover is a must, but buying new life insurance policies, particularly unit-linked insurance plans (ULIPs), would be pointless. Such instruments are typically meant for the longer term, which means that they entail a lock-in period of, at least, three years and deliver good performance only over a period of time — features that certainly won’t appeal to senior citizens.
While many senior citizens have a comfortable savings cushion, there are many others who spend their lifetime’s savings on their children’s wedding or lavish lifestyles.
Says Abhay Credit Counselling Centre head VN Kulkarni: “Several senior citizens who come to us are neck-deep in debt due to lack of proper planning. In several cases, we have seen that their children have had to take up the responsibility of repayments. Such situations can be avoided by saving wisely and spending prudently.”
The idea is to make sure that you leave behind the legacy of assets, and not liabilities, for the next generation.