Worried about income after retirement?

One of our acquaintances, Mrs Parlekar, 64, stays alone in her Andheri home as her husband passed away two years back and both her sons are settled in the United States.

Mrs Parlekar has savings of  around Rs1.5 crore which is locked in bank fixed deposits (FDs). She has divided this amount in three parts of Rs50 lakh each. She has kept aside two of these accounts for her sons and uses the interest from her third account for her daily expenses on a monthly basis. She gets a monthly interest amount of around Rs35,000 post tax for her daily expenses, which include medicines that cost around Rs10,000-12,000. 

Prima facie a good arrangement, till I received a phone call from her. This is when she mentioned that the society in which she stays has decided to go for redevelopment. In lieu of the flat, she is getting Rs60 lakh from the developer. The possession of her new flat was expected in four years time. So what are her options now? Either she should rent a flat or purchase one. Mrs Parlekar was not keen on moving out of the area where she was staying as she was quite comfortable there. However, when she scouted for flats in her area, she found out that they were in the range of  Rs1 crore.

She didn’t like the idea of renting a flat and if she wanted to buy a flat, she would have to break her FD of Rs50 lakh and also use the Rs60 lakh given by the builder. Then, she would have been left with just Rs10 lakh and interest from the same wouldn’t have been enough to meet her daily expenses. She even considered breaking the FDs which she had kept aside for her sons to meet her regular expenses. She asked for my advice before taking this step.

I mentioned to her about reverse mortgage that is ideal for people like her who are senior citizens. In reverse mortgage, a person can mortgage his/her primary residence with a bank and receive the mortgage amount as periodic payments, be it monthly, quarterly, half-yearly, or yearly. It is the reverse of taking a home loan where an EMI is paid to the bank and at the end of the tenure, the property belongs to the owner. In case of a reverse mortgage, the bank will pay EMI to the owner, and after the death of the owner and spouse, either sell the property to recover the loan with interest or the heirs can pay the loan with interest and take the flat back.

This is a good product for retirees who are cash-poor but asset-rich. They can utilise their asset to get regular cash flows. Also, in case of a reverse mortgage, there is an option to take the amount as a lump sum in place of regular cash flows. For those who want the reverse mortgage for taking care of their regular expenses, they can opt for the option of regular cash flow periodically. The biggest drawback here is that it is for a maximum tenure of 15 years. After this period, the cash flow will stop. The bank will not take possession of the property as long as the husband or wife is staying in the home. Thus, in case the couple outlives the term of 15 years, they will have think of some other means of generating income to support themselves.

So how can you generate income if you outlive the tenure? The better option is to take a lump sum against the home and invest the money in such a way that it will give return for the entire life and not only for a fixed term. This, in turn, will take away the issue of getting money from the bank for a fixed tenure.

One can buy an annuity for life when one doesn’t have to worry about living long. This annuity of life has two options; first, you can buy a plan where the capital is returned after the death of the buyer of the annuity or where the capital is not returned after death. In case the capital is paid back, the annuity amount will come down significantly. So, one should be very careful while choosing the option of with return of purchase price or without return of purchase price.

For a flat of around a crore, the lump sum amount will be around Rs20 lakh. In Mrs Parlekar’s case, along with that, the remaining amount of Rs10 lakh from the FDs makes a total of Rs30 lakh to purchase an annuity.

Below is an example for a few companies where an annuity is bought at Rs30 lakh for a person aged 60 years of age.

In case Mrs Parlekar had taken a monthly payment from the bank, then she would have got around Rs4,500 per month for a period of 180 months. Along with that, she would have got around `8,000 as interest on the Rs10 lakh FD that was leftover. Thus, she would have got a total monthly inflow of Rs12,500, which is far too less compared with around Rs30,000 that an annuity plan will pay off.

The best part about choosing a return of purchase price option is that the legal heir can get the purchase price back and with this purchase price, he can pay off the loan from the bank for reverse purchase and then take the property back from the bank. They will have to pay the additional interest amount to the bank from their profit. But since the requirement of monthly inflow is high in case of Mrs Parleker, we recommended her to go for without return of purchase price option. Thus, weighing these options we recommended Mrs Parlekar to buy the new flat and use it to pay for her pension. Additionally, she didn’t have to liquidate the savings she had made for her children.

The writer is a certified financial planner working as head, research, Apnapaisa.com, a price & features comparison engine for loans, insurance & investments. He can be reached at abhishek.singh@ apnapaisa.com.