We all conjure a happy picture of our post-retirement life. A life free of worries with loved ones and having all the time in the world to indulge in activities missed out on earlier. In our productive working life, we focus on accumulating a corpus that would be sufficient to sustain us post-retirement. However it is equally important how we manage our retirement money to lead a financially stress free life.
One challenge that many retirees face is the selection of investment options to deploy their retirement funds. For the salaried individuals, the total cash inflow at the time of retirement typically runs into lakhs of rupees. This can be in the form of provident fund, pension, superannuation, gratuity, leave encashment, etc. Usually, money also pours in from long term investments like public provident fund (PPF) and insurance policies whose maturity concur with the time of retirement.
The deployment of such huge funds has to be done in a manner which would ensure a regular stream of income in the absence of any salary or business income to meet the day-to-day expenses till lifetime.
Bank Fixed Deposits, Monthly Income Scheme (MIS) and Senior Citizen Savings Scheme (SCSS) are the common avenues where retirees usually park their funds. Here are some additional options which are not commonly considered. These take care of capital protection and help generate a regular monthly income. These are:
1) Annuity:
With huge retirement funds at disposal, retirees face a lot of expectations from their children, relatives and even friends for temporary monetary help. The social fabric of Indian families is such that parents are not absolved of their financial responsibilities towards children even after retirement. Parents selflessly spend a major portion of the retirement funds, be it for children’s marriage or making a down payment for their new home. Later, some parents realize in hindsight that they have compromised on their own financial security and are left with no choice but to depend totally upon their children.
To avoid impulsive decisions, an immediate annuity product is the best option to park in a portion of the retirement funds. The annuitant pays a lump sum premium towards the price of the policy and the insurance company pays him a uniform payment at regular intervals. It is the most suitable for people who are regular income seekers, not having any pension income and do not want to depend upon children.
While the returns are not attractive (at times even not matching fixed deposit rates), one can bank on a regular monthly income for lifetime. There are various annuity options which provide the annuitant a regular income throughout his lifetime and in some of the options even the spouse continues to get the monthly income after his death.
2) Systematic Withdrawal Plan (SWP) through a Debt Mutual Fund:
This is one of the best ways to ensure a monthly flow of funds and tax efficient too. One can invest in a debt mutual fund and take out money from it every month by choosing for the systematic withdrawal plan. One can also opt for the dividend option of a debt mutual fund which will pay dividend depending upon the fund performance. The returns of a debt mutual fund are linked to interest rates in the market and are not guaranteed. However, they are relatively less risky and volatile compared to equities and have a tax advantage compared to most other fixed income investments. The dividend income from all types of debt mutual funds (barring liquid funds) is taxed at 12.5 per cent plus education cess. The long term capital gains on debt mutual funds are taxed at 10 per cent flat or 20 per cent with indexation.
3) Public Provident Fund (PPF):
Many investors commit the mistake of withdrawing the entire PPF proceeds at the time of retirement. This is because retirees have this common notion that their funds would be blocked for another five years. Not many people know about the withdrawal rules of PPF account after maturity.
If the PPF account is extended for a block of five years after maturity with new contribution every year, the investor is entitled to withdraw a maximum of 60 per cent of the balance outstanding at the commencement of the five year extension. So for instance, a PPF investor has Rs.50 lakh on maturity during retirement. He retains this amount in PPF for an extension of 5 years. He can withdraw a maximum of Rs.30 lakh during the five year block period. Note that the funds can be withdrawn from the PPF account only once a year.
In case the PPF account is extended without contribution, there is no limit for withdrawal.
Withdrawing the interest portion every year and keeping the outstanding balance invested for a block of five years is a smart way to earn tax free income. Locking in money for five years will also ensure discipline.
Busting the Myth of Safe Returns of Retirees:
It is a common tendency of individuals (even HNIs in some cases) post retirement to make all their new investments in fixed income investments. The focus mainly is on capital protection for the retirees. The biggest threat however for the hard earned retirement corpus built painstakingly over a long period of time is losing its value due to inflation. For instance, an item worth Rs.100 today would cost Rs.216 ten years later assuming an inflation of 8 per cent per annum. During the same period, an investment in fixed deposit worth Rs.100 at an interest rate of 9 per cent per annum would fetch a slightly higher amount of Rs.236. Assuming post tax returns, this amount get reduced to Rs.218, Rs.200 and Rs.184 depending upon the 10, 20 and 30 per cent tax brackets, respectively. Thus, a retiree will buy less number of things with the same amount compared to the present.
The second threat one is exposed to is the fluctuation in interest rates. And it is not just bank fixed deposits, the interest rates on all post office saving schemes (including PPF) are being proposed to be linked to market rates every year. So the risk of inflation eating into returns is high and it erodes the investment corpus for real.
It is thus prudent to have some exposure to equities in the overall portfolio. Depending upon the financial situation, a retiree can gradually reduce his equity exposure to a certain extent and increase the debt component in the overall portfolio. The presence of equity can give a real kicker to the overall portfolio over a longer period of time and help beat inflation.
However, investment in equities does not mean seeking thrills in trading. Unless one has a reasonable amount of expertise in the market and not a beginner, a small exposure into direct equity can be taken. Even cash rich companies, having a good long term track record of doling out regular dividends can be invested in.
The overall investment allocation of a retiree would depend upon:
Adequacy of the corpus being accumulated which will last till the entire retirement period taking into account inflation.
Continuity in monthly stream of income post retirement in the form of pension, house rental income or any part time job.
Any chronic illness or consistent health problems which could entail huge medical costs in the future.
Any responsibilities pending in the form of debt repayment, children marriage, etc.
A retiree must thus assess his short term and long term needs before deciding on the investment allocation of his retirement funds. He must also assess beforehand the tax slab he is likely to fall under after retirement so as to apportion funds for investment in the most tax efficient manner.
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