Strategies ensure financial success…. not the products.

Mrs. ABC aged 70 years recently lost her husband due to massive cardiac arrest. She is a home maker and has no children to look after her. She has kept a 24 hours caretaker for herself who also does all the other household chores.

The total savings and insurance proceeds from her husband’s death claim totals to Rs. 15 lakhs. Her monthly expenses today are Rs. 15000/-(including care-taker’s salary). She has a self occupied residential property worth Rs. 75 lakhs. Sadly her husband had not made any provisions for the retirement and was working till the end for meeting the ends. She also has a mediclaim policy, the yearly premium of which is included in the monthly expenses. She does not have any life insurance.

Her requirements:

- She needs the monthly income to sustain her lifestyle till expected life of 85 years.

- She does not want to relocate to any other place.

- After her death the money and the property proceeds should be donated to a charitable trust.

There were myriad of options available to her suggested by relatives, friends, insurance agents, financial advisors, etc. Some of the options were:-

· Buy an immediate annuity from LIC, Post office monthly income scheme (POMIS), senior citizen scheme, FD, etc.

· Buy a property for the amount and get a rental income.

· Keep in savings account and utilize the same as required and for any emergency needs.

One of her well wishers suggested her to consult an expert before taking a decision, as this situation was critical. She was referred to us.

Our observations:

The monthly cash flow requirement for the next 15 years @7% inflation will be as under:

· Immediate annuity will provide only Rs. 7500/- p.m calculated at current annuity rates @6% p.a. This is far less than her monthly requirement and also the money may be stuck for life time leaving no room for any emergency. Similarly POMIS may give 8% p.a and SCS 9% p.a. No provision for inflation and emergency fund.

· To buy a house for rental income means expense for brokerage, stamp duty, etc. leaving lesser money for buying say, Rs. 13 lakhs. Rental income could be @6%p.a of the value of the property i.e Rs. 6500/- p.m. Charges like maintenance, rental brokerage, etc. may prune down the income. She may also face the hassles of the legal formalities and expenses everytime the rental agreement is renewed. Income is very much less than the requirement and no emergency fund.

· Rs. 15 lakhs kept in a savings account @ 3% p.a may last only 7 years. Any emergency fund utilized during this period may further reduce the period.

Suggestions & Recommendations:

- The self occupied residential property may be utilized for Reverse Mortgage (RM) scheme. Market Value (MV)= Rs. 75 lakhs. Amount considered for RM=60% of MV= Rs. 45 lakhs. With 10.5% p.a interest rate, the monthly payout works out to Rs. 10,368 (say Rs. 10,000) for 15 years. This will be straight line payout.

- Out of 15 lakhs available, 2.50 lakhs may be kept as a FD @ 8% (senior citizen) for any emergency.

- The balance 12.50 lakhs may be deployed in a good debt oriented fund, preferably an MIP, with 70% debt and 30% equity capable of delivering an average weighted returns of @9%. Register a Systematic Withdrawal Plan (SWP) every year for the difference of the amount required (difference of : Monthly requirement – Reverse Mortgage Payout).

In this way the monthly expenses requirement factoring inflation may be easily met. At the end of 15 years, if 2.50 lakhs had not been used, it would likely have grown to @ 8 lakhs which may be used further if need arises. She can continue to live in her house till she lives without bothering to repay the mortgage loan. After her death the lending institution will adjust all its dues by selling the property at the then market value and any leftovers can be donated to the charitable trust as per her will.

Atul Mishra is a Certified Financial Planner and a Chartered Wealth Manager and can be reached at atulnmishra@gmail.com