Money management for the elderly is crucial as they are no longer in active service and therefore, there are no regular cash inflows. What therefore they need to do is to ensure that they live a happy and dignified life within their resources. It means they manage their “existing finances” in a way so that these can last till they live in this world. This is more particularly true for those who do not have any pension after they retire. Assuming a person retires at the age of 60, he / she has to plan the finances for at least 15 to 20 years of post-retirement lives for himself / herself as well as the spouse. With virtually no social security and living in a world of high inflation and low return, it is a difficult task for the elderly to survive. This becomes all the more important as we age, and medical expenses become high and unpredictable.
Under the above circumstances, sound principles of financial management become crucial as it is impossible to lead life without money.
Some Financial Management Strategies:
Assess Requirement of Corpus: This is the first step. Every elderly person must estimate the monthly financial requirement for food, medicine, medical insurance, essential / other items, and also keep a reasonable surplus for future unanticipated expenses. Say for example, the total expense on a monthly basis comes to around Rs 1.00 lac for two-member family. Therefore, on an annual basis the anticipated expenses are Rs 12.00 lacs. Assuming annualized interest income of 5 per cent on deposits, total corpus requirement on pre-tax basis will be around Rs 2.50 to Rs 3.00 crores as of today. Though it is a very simplistic calculation devoid of any discounting impact, it gives a fair idea of how to assess the corpus. The assumption of corpus is based on estimation of two variables namely, “interest rate” on the corpus and “expenses”. This assessment is crucial as corpus is the primary source of financial inflows for family of an elderly.
Maximize Returns with Reasonable Risk: This is the next crucial step. Every senior should try to see how to maximize returns on the corpus without taking high risk. This is important as bank fixed deposits though safe to some extent, do not yield adequate return. It may, therefore, be advisable for them to invest some amount in alternative schemes like Senior Citizen Saving Scheme (SCSS) and / or Pradhan Mantri Vaya Vandana Yojana (PMVVY). Both are good in terms of return with marginal differences in liquidity. There are also opportunities by way of fixed income investment in some good highly rated corporate sector. The seniors may think of investing at least some portion of their corpus in such securities. Considering high risk, we would suggest elderly to avoid investing in share market other than through select and appropriate mutual funds. A small portion of the surplus funds available with them (10 to 15 per cent) may be invested in such funds. It is, however, always suggested that they go through an expert advisor if they are not well-versed with nuances of capital market.
Minimalistic Attitude: It is time seniors look seriously at their cash outflows. It is particularly true for those who belong to the middle class. While we do not recommend seniors to be misers, we call upon them to be realistic in terms of their expenses, take a minimalistic look at life, avoid rich lifestyle and try to maintain a healthy balance between income & expenses leaving a balance to take care of unpredictable future contingencies. The most important strategy involves changing lifestyle habits or taking some definitive steps to reduce the cost of living. For example, if an elderly person is staying at a big house, one may not require and if the person is finding himself / herself in a cash crunch situation, he / she may explore possibility of shifting to a smaller rented place or an old age home by selling or renting out existing house. The steps are not prescriptive but suggestive depending on individual needs and choice.
Getting Cash from Unconventional Sources: Sometimes the elderly need to look at unconventional ways to improve their cash augmentation strategies. One such way could be “Reverse Mortgage”. Under this scheme, a senior citizen (age 60 plus) can mortgage his / her unencumbered residential property to a lender (bank) and a get a specific amount from the lender for a specific period of time (max 20 years). Amount to be received from the bank depends on value of property, age of borrower and prevalent interest rate. Further, the borrower is under no obligation to repay the loan during his / her lifetime if he / she chooses to continue to stay at the house. After death of the borrower, his / her spouse (co-borrower) can continue to stay till his / her death. After demise of both the co-borrowers, loan could be adjusted after selling the house. The seniors need to be aware of such schemes and they can resort to them, if need be.
Monitoring & Control: Last principle of any prudent financial management is strict monitoring to ensure that everything is going on well. In this context, the senior has to ensure that risks taken are within safe limits, they are not falling prey to any frauds / scams, all loopholes are plugged, and cash inflows are more than outflows. This constant monitoring will help achieve the financial management goals. In this world of cybercrimes being the order of the day, the elderly have to be very cautiously aware of the fundamental preventive rules like linking only a small amount to payment gateway or not telling the OTP/ Psswords to anyone or not clicking on any unwanted link, etc.
Conclusions:
With a view to ensuring that an elderly is able to continue to live a life with dignity and happiness, he / she is required to follow the sound financial management principles. That alone can be one of the pillars of a happy life ahead.
This article is written by Dr. A K Sen Gupta, Chief Trustee of My Retired Life Foundation (MRLF).
