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We are considering two kinds of scenarios. One is of people who are retired and using their PF money to get a constant or regular source of income via rent. The other aspect of this particular discussion is having rental income as a source of your second income. So, let us consider the first aspect that we are dealing with retirees who prefer to invest their PF money in real estate and get rent as a regular source of income. Does it really work?
PF is a big portion of a retired person’s income, it’s a lump sum corpus which they get. Generally, in India we have this mind set and a preference towards physical assets whether it is real estate or whether it is gold and we believe that the physical assets not only give us capital appreciation but something like a real estate also give us a regular rental income and that is the reason we are inclined towards real estate.

Having said that, real estate has its own challenges as a large amount of money has to be put up front to buy real estate. Rental income is a good second source of income. In real estate the rental yield in metros and smaller cities is anywhere between 3% and 5%. With that rental yield, you also have to pay property taxes and then it drops to less than 3%. So, retired people should really reconsider putting their entire EPF money into buying real estate in the hope of getting a good rental income.

Do you think it is a fair deal to have that money invested in real estate? I get it that for a lot of Indians, real estate is a safe haven. They want to safeguard the money, the lifelong savings or earnings. But can this be planned better and do we really need real estate when it comes to parking all your lifetime funds?
With the retirement fund, if we have to list down the objectives, your first objective is to get regular cash flow. The second objective is capital protection. The third objective is that the investments need to be tax efficient. And the fourth and the biggest aspect for a retired person is liquidity.

If we were to look at real estate on these four aspects, when it comes to liquidity, once you invest a very big amount of money in real estate, it is not very easy to liquidate it. It is not as tax efficient, like we said that the income is taxed at your tax slab rate.

The third thing is rental yields are low. If you consider more options, like a hybrid investment portfolio where 70% to 80% can be parked in debt instruments, long-term bonds which in the current market with the high interest rates giving you anywhere between 7% to 7.5%. Even post tax they are giving you returns which are as high as 5-5.5%. Together with it, 20% to 30% can be into hybrid funds or it could be into largecap index funds, which can give you that capital appreciation which you expected from real estate.

Generally, people look at real estate because apart from getting that rental income, they are also looking at some capital appreciation. That capital appreciation plus an income can be taken care of with a 70-80 debt plus 20-30 equity kind of a combination. It meets your capital appreciation requirement, the equity grows over a period of time and the debt component gives you that regular, more tax efficient income with current high interest rates. In case interest rates were to head southward, there is also a chance of capital appreciation in long-term government bonds. So, retired people should look beyond real estate and rental income as options to invest in.

The other scenario that I wanted you to consider here was having rental income as a second source of income. It is not necessary that a retiree plans that way but even someone who is investing heavily or maybe has an investment portfolio and for diversification has real estate as an asset class, do you think rental income can be good?
In real estate also, there are two pluses. One is that the rental income which you get, it is inflation adjusted. Generally, the rental appreciation is about 8% to 10% annually, whereas inflation currently is in the range of 6-7%. So, the rental income is a good hedge against inflation, that is one positive when it comes to real estate. In a country like ours, which has a very large work, ing population who are still to buy houses, you can expect a decent appreciation.

So, should you consider it as your second income? A lot of time it is also advisable, especially in the present scenario where depending just on your salary is not a great idea. You need to have an investment portfolio and for a lot of people it is very important to upgrade and update your skills and to start looking at having a second income.
That first thing is to consider your overall asset allocation. Equity and real estate are growing assets and debt and gold are capital preservation assets. So, definitely, while you are young and you are trying to build multiple sources of income, you should be invested in equity and real estate which are growing assets. Once your need for the primary house is done, once you are saving enough for your key goals, retirement, kids education in case if you are in that age bracket and if you have any surplus, then you can look at real estate as one of the options where you put in an investment and you are looking at the rental income.

If I were to talk about advantages, the rental income which you get is inflation adjusted because the rent grows in proportion or a little more than inflation and second, you also stand a chance of capital appreciation.

So, if you have your overall asset allocation in mind where you know that this is my investment which will go towards growing assets, a small portion will go towards capital preservation given the age and the life stage, you can also consider real estate as an option for rental income. But having said that, rental yield is less post tax. Also, you have to maintain the property and make expenditure every two-three years to paint and to redo the property to make it eligible for rentals. You also stand a risk that there could be periods where property has not gone on rent so that will be purely an income loss and that will drop the yield.

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A lot of people want to retire at 50. So if you are 35 today and you need to reach that number, you need to be doing some really serious planning, which means that you also need to be having some really serious savings. So the next question is are you saving at least 30 to 40% of your take home?

I do a lot of sessions. And generally, I see that the average savings number is about 20, 25%. And very, very few people are able to reach this 30-40% number. So that is what one really needs to check and make course correction accordingly.

The third thing that you need to also check is interlinked to the amount of savings that you are doing, to check where are you on loans, especially unsecured loans, because unsecure loans affect your credit score. Unsecured loans are really expensive. Remember, your income is not increasing even at the pace at which the interest rate that you are paying for a personal loan or a credit card loan. So obviously, you need to ensure that by the time you reach 40, the only loan that you probably have is the home loan. And you have really cleared off all of your other loans. I would say these are the first three fundamental things that you need to have in place before you turn 40.

How can one achieve this because you need to get your basics right, definitely but what if you have not reached there yet? Let us just talk about liabilities. The financial liabilities that should just be done with.
Hopefully, nobody will have an education loan by that age. But, you know, given the fact that that is the time you start a family. People do tend to take a lot of pay later or credit card loans for a vacation or personal loans, for marriage and all that. Clearly these are expensive loans and you need to draw up a plan. First of all, it really means you need to go on a complete spending detox. You need to try and save as much as possible so that you can look at repaying these particular loans. There is really no other way around it.

What about those people who plan an early retirement or maybe want to come up with something on their own or plan a second income when they are 40? This really needs a certain amount of thinking and introspection in terms of your life going ahead, your finances and the kind of financial responsibilities you have. How can one go about it?
The first thing is to have a financial planner in place. I do not really believe that it is one of the fundamental things that one needs to have, which is to have a financial plan written for yourself with the help of a financial planner. And because, on your own, a couple of things happen. So, here are the next few things that you really need to start thinking about.

Have you actually made the right financial goals? are the goals defined properly? Just to give you an example, what happens is that somebody has a goal and decides he needs about Rs 20 lakh for his child’s education based on today’s cost levels. But they do not take into account inflation. And with inflation, that amount 10 years down the line is actually going to be Rs 35 lakh. So they end up investing the wrong amount.

Point number four and five would be that you need to ensure that you have thought about your goals very clearly and taken inflation into account when you are saving for those goals. Now, coming to retirement, again, the earlier that you start saving for retirement, the better it is because the amount that you need to invest is going to be lower.

Let us take an example of a person who has an expense of Rs 1 lakh per month. Let us say this person is 35 and wants to retire at 60. Now, at the age of 35, this person needs to invest Rs 1 lakh. If we take into account inflation at 6% and return on investment, a simple 8%, which you will get in your EPF. But if you delay this investment by 10 years, if you do not start at 35 but start at 45 instead, then the amount that you have to invest is much higher. It is around Rs 1,65,000.

After getting these basics in place, you have to really focus on your financial goals to see that have you set your goals correctly? Have you taken inflation into account while investing for these goals? And of course, it goes without saying that you really need to start investing early. The next thing would then be to see where are you going to invest?

For example, the household savings data came out recently which showed that equity allocation that households have is still less than 10% which means that on a majority of investments that they are doing, if we exclude real estate, are not beating inflation. So one more thing is to go and check two things; one, is my portfolio actually beating inflation or not? And for that, what you need to do is that you put down each asset class in your portfolio with the estimate that you are getting and please take conservative estimates and the percentage allocation.

For example, if you have 10% allocation to equities and you have got 60% allocation to fixed deposits, maybe 20% in insurance schemes and 10% in the employee provident fund. Typically I see that for most people, 90% of financial assets will be in fixed return instruments and only 10% is going to be in equities. In this case, your return is working out to 6.4% which means it is not really beating inflation. One of the very important things to do early on is to ensure that wherever you are investing, the portfolio as a whole needs to be able to beat inflation and you need to have a good amount of allocation.

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