Planning retirement without kids? Here’s how to make the most of it

The Dink lifestyle is often associated with freedom–freedom from parental responsibilities, from stress, and sleepless nights. But beyond these preferences, there’s a financial case, especially when you crunch the numbers.

<a class="backlink" target="_blank" href="https://www.livemint.com/money/personal-finance/the-rising-cost-of-education-in-india-how-parents-are-managing-the-financial-burden-11692551244691.html" data-vars-page-type="story" data-vars-link-type="Manual" data-vars-anchor-text="A Mint story earlier estimated that a parent spends roughly ₹25-50 lakh”>A Mint story earlier estimated that a parent spends roughly ₹25-50 lakh on a child’s school education, depending on the type of school they select. Higher education costs are even higher. 

Radhika Gupta, MD and CEO of Edelweiss Mutual Fund, said that she aims to build a ₹10 crore corpus for her son’s higher education in the next 20 years. Deepak Shenoy, founder and CEO of Capitalmind, said in today’s terms, he needs ₹2.4 crore for his son’s education in the US. His son still had four years left before starting college.

According to Mint’s calculation, it will take roughly ₹58.2 lakh (in today’s time) to take care of a newborn’s basic expenses, and later schooling and higher education. If parents plan a higher education in the US, it can increase to nearly ₹3 crore.

The calculation assumes the current price and future costs can be significantly higher after accounting for inflation.

“Not having to deal with a child’s education expenses, marriage, and all other costs means achieving their retirement income becomes easy,” said Abhishek Kumar, an RIA and founder of Sahaj Money.

But how do you translate this financial headroom into a stable, secure retirement? Two options stand out: Joint life annuity and reverse mortgage.

Joint life annuity

Life insurance companies offer various kinds of annuities. Here’s how it works: Investors give an upfront amount to life insurance companies in return for a fixed amount of interest. 

They can be structured in various ways, like when the annuity is guaranteed for a certain period, and the family members of the holder get the payout for a set period even when the subscriber passes away, or when the payout will continue as long as the subscriber lives, but the initial investment would be returned after the holder’s death.

Couples without kids don’t have to leave behind anything for their family. They can opt for higher monthly payouts without worrying about passing on wealth. In this ‘joint annuity for life’ format, the annuity pays out as long as either spouse is alive, but stops after both pass away. If either of the spouses is alive, they have to continue the repayments.

The life insurance offers a higher interest for such a product, especially if the couple is old. The annuity provider’s calculation is that the couple will pass away before they (the annuity service provider) start losing money.

Here’s an example: A 75-year-old couple investing ₹1 crore in such a plan could get ₹76,452 monthly (9.17% annually), according to NSDL data from June 2024. The number is calculated by taking the average of what all annuity service providers (ASP) were offering on 8 June 2024. If only one person opts in, the payout can go as high as ₹95,762 (11.49%).

Ravi Saraogi, an RIA and co-founder of Samasthiti, said that such high interest looks attractive, but it is not inflation-adjusted. He also said that there are policies that increase the rate of growth of annuities, but those typically start with lower interest rates. Moreover, interest rates offered by annuity service providers (ASPs) will change over time, and investors have to decide whether it is worth it based on the prevailing rates at that time.

Saraogi said that annuity planning looks simple due to the fixed interest component, but it is not as simple as it looks. “People need to make calculations of inflation and also need to smartly invest the balance amount left after spending to inflation-protect future annuity payments. Annuity is not a hassle-free product as most think; it involves substantial planning,” added Saraogi.

People can buy annuity plans independently, whereas subscribers of National Pension Scheme (NPS) have to mandatorily invest 40% of their corpus into an annuity product after they turn 75. They can start allocating to annuities at age 60. 

Also Read | Retiring soon? A three-bucket strategy may be just the ticket for your bucket list.

Reverse mortgage

Traditionally, Indian families pass down their homes to children. But for Dink couples, that obligation doesn’t exist. This opens the door to a lesser-known financial tool: reverse mortgage.

You pledge your self-occupied house to a bank, and in return, receive monthly payouts for a fixed period. The bank recovers the loan—principal and interest—by selling the house after both spouses pass away. 

For instance, if a couple owns an eligible home worth ₹1 crore, then the banks may agree to disburse a loan of let’s say ₹ 80 lakh (80% loan-to-value ratio). If the interest rate offered is 10.5% and the term is for 15 years, then the couple will receive a ₹18,432 monthly payout for the agreed term. 

Banks will recover the total loan amount of ₹80 lakh by auctioning the property after both couples die and pass on the remaining amount to a family member or assigned heir. Banks have the right only to the loan amount and not the entire sale value. Banks generally offer 10-13% for reverse mortgage loans.

Harsh Roongta, an RIA and founder of Fee Only Investment Advisers, said that the interest rate in reverse mortgage is typically high, and people should be mindful of how much they are getting and for how long. “They can’t throw you out of the house unless you die, but the payments can stop,” Roongta added.

Roongta says people should also be mindful of the other downsides. Firstly, such assets are hardly picked up, and neither are banks keen to advertise them. There is also a cap of around ₹1-2 crores that many banks have on reverse mortgage loans, which may not be enough for many people, especially those in metropolitan cities. 

If the property/building is ancestral and is older than 40 years, banks might not accept it for a reverse mortgage. They also have to mandatorily take home and life insurance, even when the premiums might be high.

Another caveat is that the borrower (senior citizen) must reside in the mortgaged house. If they don’t stay there for more than 12 months, banks can take possession of the property. 

Also Read: Why most retirees don’t find refuge in reverse mortgage

Is it really stress-free?

Investment advisor Abhishek Kumar said that both products involve substantial risk, as the principal amount is locked up in both cases, and senior couples might need a lump sum in case of a medical emergency.

In the case of a reverse mortgage, the house cannot be sold or vacated even in case of emergencies, and a joint annuity for life requires subscribers to commit to a huge upfront lock-in amount.

In a reverse mortgage, in case of a medical emergency or other such cases, most banks offer lump sum payments, but are limited to 50% (capped at ₹15 lakh) of the total loan amount.

So what is the alternative? Kumar said that buying a mix of equity and debt through mutual funds and doing a systematic withdrawal plan (SWP) might be more suitable if it is planned out well. Senior citizens can also buy high-rated bonds, which can be sold off in the secondary market.

Roongta said that the two products—joint life annuity and reverse mortgage—sound good in theory, but real life can be entirely different. Mint advises people to consult a registered investment advisor to draft a plan before taking any action.

Also Read: Why more equities won’t save you from low withdrawal rates in retirement