Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money,” says British author Jonathan Clements. What can help you to ensure that you don’t run out of money is having a two-pronged investment strategy that ascertains that you have adequate monthly income and at the same time, your corpus lasts long enough so that you never really fall short. You can do this by splitting your corpus in a way that you have regular income and are also able to accumulate for the future.
According to Mumbai-based certified financial planner and author of Mindful Retirement Kiran Telang, “One part of the retirement corpus should go into a pool that will generate a fixed regular monthly income. This will go into fixed-income instruments.”
For regular income, your options are investing in fixed-income products such as Senior Citizens Savings Scheme (SCSS), post office monthly income scheme (POMIS), bank fixed deposit (FD) and liquid- or ultra short-term debt funds.
“SCSS is an ideal choice for seniors looking for regular income and it offers higher returns (8.60% per annum) as compared to other similar instruments. Invest in SCSS to get safe, fixed and regular cash flow,” said Anuj Shah, chief financial planner, Wealth 360, a Mumbai-based financial planning firm. The investing tenure of SCSS is five years, which can be extended by three years once it matures. The interest is payable quarterly and is fully taxable.
However, investment in SCSS also gives tax benefits under Section 80C. “Invest ₹15 lakh with you as the first account holder and wife as the second holder. Open another SCSS of ₹15 lakh with the spouse as the first holder and you as the second,” said Anuj, talking about how to maximize tax benefit. SCSS also offers the highest post-tax returns compared to other fixed-income products such as five-year tax-saving FDs and National Savings Certificate (NSC). Another safe and regular income-generating product is POMIS, which has a five-year tenure and gives an interest of 7.6% per annum payable monthly. “The investment limit is capped at ₹9 lakh under joint ownership and ₹4.5 lakh under single ownership,” said Anuj. However, this comes without any tax benefit at the time of investment. The interest is fully taxable and it has an investment tenor of five years.
Bank FDs are also a popular choice for retirees with tenures ranging from one to 10 years. Currently, State Bank of India (SBI) gives a rate of 6.75% per annum for its three-year FD. Most banks offer senior citizens an extra 0.25-0.50% per annum than regular FDs. For instance, SBI offers 0.50% extra to senior citizens. With FDs, you can choose different tenures and pace out the maturity as per your time frame. However, compared to SCSS and POMIS, interest on FD is lower and fully taxable. But remember, senior citizens can also claim deduction on interest earned up to ₹50,000 in a single financial year under Section 80TTB from all these instruments.
Then there are annuity plans. To start getting immediate annuity from a life insurance company, you need to make a lump sum investment. There are a number of options to choose from, like an annuity for life, annuity with return of purchase price, life annuity that increases by 5% every year with a return of purchase price on death, and life annuity that increases by 5% every year without return of purchase price on death. An annuity that increases every year tries to play catch-up with inflation, thus helping you more or less maintain the same standard of living.
However, most financial planners consider it the last option due to low returns and lack of liquidity. “We do not recommend an annuity plan strongly. But it depends on the nature of the investor; if that person is comfortable with the assured income and he doesnt want to take the risk of longevity, then annuity can be a good product for him,” said Rohit Shah, founder and chief executive officer, Getting You Rich, a financial planning firm. However, one should also keep in mind that the corpus is given up forever once you opt for an annuity scheme, added Rohit.
Funds required for the short term can also be parked in liquid or ultra-short debt funds. With debt funds, you have a chance to get higher returns than FDs. “Debt funds are also more tax efficient than investment in fixed deposit,” said Rohit. Returns from debt instruments are considered as capital gains and enjoy indexation benefits in the long run (if held for more than three years, long-term capital gains are taxed at 20% but after adjusting for inflation), whereas returns from FD are considered as income from other sources and no indexation benefits can be claimed. Systematic withdrawal plans (SWPs) from debt mutual funds can also help you earn regular income. They allow investors to withdraw a specified amount regularly.
When investing and accumulating a retirement corpus, you need to remember two things. One, inflation can eat into a corpus that seems large enough to see you through retirement and two, considering increased life expectancy, it is important to plan and save for a longer retirement period. To beat inflation and to cater to a long period, it is important to dip into equities. “After eight to 10 years, fixed-income part (investments) will not be sufficient. This is when you will need your equity portfolio to come into play,” said Telang.
However, you need to choose the equity funds you invest in carefully. “Since a senior citizen’s risk-taking appetite is less, pure equity fund is not recommended. But a combination of equity and debt like hybrid funds can be taken,” said Anuj. Depending on your risk appetite, you could also park a portion of your money in index funds, which are low-cost passive equity funds. Apart from equity, “one may also invest in 7.75% RBI savings (taxable) bond, some portion in gold, and also in real estate investment trust (REITs),” said Rohit.
Remember that the goal should be to enjoy retired life to its fullest, but not exhaust the retirement corpus in the process.