We were walking along the riverside, enjoying bird sightings with my cousin and her husband. He described to me a problem that I have heard several times. Interest rates are falling and inflation is rising. How does a retired man with conservative investments in deposits and bonds manage his life without despair? Set your mind free from holding someone else responsible for your happiness, I had to tell him. Freedom from misplaced entitlement is precious. Freedom to be in charge of one’s money is easy if one breaks away from this mindset.
I began by describing what could be wrong with his approach to retirement income. First, interest rates are now free to be determined by the market. The government no longer fixes an arbitrary interest rate at which institutional lenders must ‘accommodate’ borrowers or retail lenders like him must receive ‘adequate’ compensation. Everyone has to queue up to borrow at rates that reflect their credit worthiness. Retired investors like him have the freedom of choice.
Second, inflation rate is not a high two-digit figure that it was in the 1980s (good old times of his memories). The RBI has targeted 4% per annum with a tolerance band of 2%. Since interest rate is the compensation for loss of purchasing power from inflation, the best borrowers will just match that rate. The government, which is the benchmark best borrower in the system, is unlikely to pay more. Any newly minted finance company offering 12% interest rate is not being benevolent to retired investors, distributing ‘attractive’ interest. It is just too risky to get money any cheaper. Thankfully, they are not the only borrowers asking for retired investors’ money.
Don’t be the providerThird, keeping the corpus ‘safe’ and using only the interest income it provides traps the retired in penury and frugality that is unwarranted. The basket of goods that the elderly consume is different in composition and proportion from that used by the RBI to compute its inflation numbers. That is only the baseline. If the best borrower matches this baseline, interest income from safe choices alone is bound to be inadequate. The freedom to use the retirement corpus rather than conditioning oneself to pass it on fully intact, is precious. Drawing down a small portion for themselves every year is the freedom to use one’s money that every retired investor must exercise.
Fourth, the children of retired investors today are not working for the government with a fixed salary that adjusts for inflation annually, and moves up from seniority- and tenor-based promotions. Thanks to economic liberalisation, they now have global employment opportunities that pay them well. They technically don’t need inheritance even if the parents are keen to patronise them. Parents of the previous generation are playing out the ‘provider’ role that they seem to miss in the modern marketplace as a source of succour to their children.
Even as the children persuade the parents to spend their wealth as they wish, retired parents want to pass it on, denying themselves the joy of their own money. It is time to break out of this mindset.
Set your assets freeFifth, wealth remains imprisoned in assets that are seldom used by the retired parents and, perhaps, not likely to be cared for by the inheritors. Those plots of land, ancestral residential properties that cry for renovation, and ‘investments’ made in tiny flats here and there, are all wealth waiting to be freed up. Settling for a rental yield of 1.5% is difficult to justify, more so when the property will remain as wealth on paper that will almost never be used by this generation, or the next.
What does being in charge of one’s money look like? First, list and value in current market terms everything that you own. Every little asset lying on paper and in bank lockers. Second, ask how much of it you should use and how much should be passed on. I know of retired investors worth Rs.10 crore, complaining about their meagre annual income of Rs.6 lakh from their bank deposits. That is 0.6% of their assets. They can use their assets in their lifetimes, if they choose to.
Use and give as you wishThird, what you plan to pass on can be invested in growth assets like equity. It fights inflation effectively and offers the benefit of capital appreciation to your children. Invest in the Nifty index if equity sounds complex, but put the money to work in an equity portfolio. Begin with 20% and build up the equity exposure over time. Your children will enjoy the growth in this asset, while you are free to use what is yours.
Fourth, draw and use little by little, what you earmarked as yours. Live life on your terms. You don’t have to set off on a world tour on a cruise ship with your spouse, but you can enjoy your everyday life without fear and apprehension. Fifth, the freedom to spend and give to causes close to your heart are precious. Every penny of yours does not have to be your children’s entitlement. You can allocate it to causes close to your heart and enjoy the power of making a change to others’ lives.
Break free from the scarcity mindset of hoarding and counting your money without using it. Be free of the self-imposed rule of passing on all that you have. Move away from the expectation that someone owes you your income, your earnings and your returns. Claim your space in the modern financial world—where you can invest by choice, manage cash on your terms, and spend or give as your heart desires. Into that freedom of choice, let your wealth awake.
The Author is CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)