Personal Finance: 45, Retired, And Lots Of Money. Wow!

PERSONAL FINANCE: SMART-INVESTING
45, Retired, And Lots Of Money. Wow!

Fine, you've taken the plunge and opted for a VRS. But do you know how to make that money sweat for you? Check this out.

By Shilpa Nayak

For Prashant Pai, 46, it was like any other working day at the bank he'd been with for more than 22 years. Pai sat at his desk and pored over the three huge tomes, checking accounts, tallying figures, and fielding the occasional phone call. A typical day in the life of Pai. Till after lunch, when he came back to his desk from the officers' canteen, via a short detour (a daily habit) to the paanwalla outside his high-rise office block. That's when things changed forever for Pai. For lying on his table in an envelope marked confidential was a circular from the management. It was an offer of a Voluntary Retirement Scheme (VRS). Pai was being offered Rs 15 lakh (including all his accrued benefits) to retire 12 years before the normal retirement age. In other words, the bank, like many old and mature organisations, was downsizing. Pai's reaction (to those who were watching him and, to be sure, many were) was curious. Chewing on his paan as he read the letter, Pai smiled. A knowing smile.

In fact, he had been waiting for this very day for some months now ever since his bank had announced that it would launch a VRS for its employees. Pai had got down to work almost immediately, planning for his retirement, which he looked forward to. He was quite tired of the dreary daily commute to work and, frankly, his job didn't excite him any longer. Pai smiled again, oblivious to the stares of his colleagues. Pleasing images passed through his mind: the backyard hammock, the painstakingly collected Carnatic music tapes, the books, the mid-afternoon gin and tonic and, of course, the poetry he so badly wanted to write.

But then Pai knew that to enjoy all those things he had to plan his finances. His son Keshav and daughter Anuradha were still in college, and his wife Parvati was a housewife with no income. But he had factored all these things in. He knew that even after he quit, he'd still need a steady flow of income and that he could not block it up in either growth funds or other long-term instruments like deep discount bonds. Instead, he would probably have to opt for a monthly systematic withdrawal plan that some of the private funds offered. Such schemes would allow him to make monthly or periodic withdrawals, depending on his needs.

Special Schemes

Pai had also zeroed in on a new scheme from IDBI Mutual Fund, which offered a unique asset allocation programme specially for those opting for VRS. The programme helps retirees select the right mix of investments to achieve an overall portfolio performance that is customised to each individual's needs. Sanjay Sachdev, Managing Director and CEO of IDBI Principal Asset Management Company, explains: ''Our asset allocation programme is all about educating an investor and making him aware of what the investment options before him are. It is about how best he can utilise the available funds for a secure future.''

Pai also found out that another mutual fund, Kothari Pioneer, offered a similar interactive programme. Even ICICI has launched pension bonds with an eye on the public sector's VRS kitty, which is estimated to tot up to a huge Rs 10,000 crore. And, as Pai's tax consultant friend told him, many other financial institutions are expected to announce schemes tailor-made for people who will opt for VRS.

When his bank first floated the idea of a VRS, Pai sat down and did some hard thinking. Not only does opting for VRS mean foregoing a regular source of income and the annual raises, but also the compulsory savings that happen because of provident fund deductions every month. That's all the more reason why, reckoned Pai, the income streams from the VRS package would have to match what he would have got if he had continued working. That's when he chalked out an investment programme for himself.

Planning For Retirement

Most retirees cannot afford to be high risk-takers. So, although Pai didn't have to pay back loans for a house and his children's college fees weren't very hefty, he decided against putting too much of the VRS package into growth funds, and opted for lower risk schemes like pension funds, safety bonds, and liquid funds. Tax-free RBI relief bonds, Konkan Railway bonds, safety bonds, PPF, and various Post office schemes were safe bets to go for. Plus, Pai chose some special deposit schemes (where interest is tax-free) designed by the Government for retiring PSU employees. One tenet that Pai knew he would stick to was never to place all his eggs in one basket; he would spread his risks across various instruments.

As a retiree, Pai knew his risk profile would be modest, but it would have to take into account annual rates of inflation that could erode his purchasing power. He would also have to do some tax planning. VRS settlements are tax exempt only up to the first Rs 5 lakh. So, Pai would have to pay taxes on Rs 10 lakh. Those were some of the irritants that had to be taken care of, thought Pai as a frown crossed his brow. But then, he thought of the idyllic life of leisure that was just around the corner. The smile came back.

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