Retirement may be the end of a regular job but it doesn’t have to mean the end of a regular income. Find out how.
The onset of your twilight years means bidding goodbye to that 9 to 5 job that sometimes drove you up the wall and made you question your self-respect. The pay check at the end of the month may have made everything seem worth it though. However, retirement will certainly be devoid of these little emotional highs and lows. But it doesn’t have to mean the end of a regular stream of income.
Most of us start saving for our retirement corpus 7 to 8 years into our jobs. The biggest challenge for most retirees, however, is making the best use of their retirement corpus that would help keep tax liability at bay and provide a regular stream of income.
Nowadays, when the life expectancy is nearly at 80 years and one retires at 58 or 60 years, another challenge would be to not outlive the retirement funds that one has set up for oneself.
Additional Reading: 5 Top Rules For Retirement Savings
Here are a few investment options for the retired to ensure that they have a regular flow of income for their household expenses:
This is a must-have in all retirees’ portfolios. One can open an SCSS account in a post office or bank as long as he/she is above 60 years. This scheme is only available to senior citizens or early retirees. SCSS has a five-year tenure, which can be further extended by three years once the scheme matures.
Currently, the interest rate on SCSS is 8.4 percent per annum, payable quarterly and is fully taxable. Once invested, the rates remain fixed for the entire tenure. A depositor can make one deposit into this account. This amount should be a multiple of Rs. 1, 000 and not extend beyond Rs. 15 lakhs. SCSS accounts are robust, safe, highly targeted and a great long-term savings prospect, making it ideal for those who’ve spent their lifetime supporting others.
Bank Fixed Deposits:
The ease of operating a Fixed Deposit makes it a popular choice among retirees and is a reliable savings avenue. Although the interest rates over the last few years have been falling, they tend to vary depending on the bank and deposit tenure.
Sometimes, senior citizens get an extra 0.25 – 0.5 percent per annum, depending on the bank. Bank deposits provide great flexibility in terms of tenure. Instead of keeping your funds parked for a particular duration, you can spread the amount across different maturities. This not only provides liquidity to funds, but also manages ‘re-investment risk’.
When the shortest-term Fixed Deposit matures, renew it for the longest duration and continue the process as and when Fixed Deposits get matured. Simultaneously, you can ensure that your regular income is met, and deposits are spread across various maturities and institutions.
Additional reading: How To Help Your Parents Lead A Comfortable Retired Financial Life
Post Office Monthly Income Scheme (POMIS) Account:
POMIS is a five-year investment with a maximum cap of Rs. 9 lakhs under joint ownership and Rs. 4.5 lakhs under single ownership. The interest rate is set every quarter and is currently at 7.8% per annum, payable monthly.
The investment in POMIS doesn’t qualify for any tax benefit and the interest is fully taxable. Instead of going to the post office each month, the interest can be directly credited to the Savings Account of the same post office. Also, one may provide the mandate to automatically transfer the interest from the Savings Account into a Recurring Deposit in the same post office.
Tax free bonds:
Although these financial instruments are not available in the primary market, retirees can consider including these in their portfolio. These are issued primarily by government-backed institutions such as Indian Railway Finance Corporation Ltd. (IRFC), Power Finance Corporation (PFC), National Highways Authority of India (NHAI), NTPC Ltd. and most carry the highest safety ratings. One may, however, buy and sell them on stock exchanges as they are listed securities.
Retirees should bear in mind a few things before investing in tax-free bonds. One, they are long term investments and mature after 10, 15, 20 years. Invest in them only if you’re sure that you will not require the funds for such a long period.
Second, the interest is tax-free, therefore there is no Tax Deducted at Source (TDS) either.
Third, liquidity is low in tax-free bonds. And lastly, they usually offer annual and not monthly interest pay-outs hence may not meet a retiree’s regular income requirement.
Additional reading: Retired? What’s Your Financial Plan Now?
When one retires and there is a likelihood of the non-earning period extending for another two decades or more, then investing a portion of the retirement funds in equity-backed products assumes importance.
Depending on the risk profile, one may allocate a certain percentage into equity Mutual Funds with further diversification across large-cap and balanced funds with some exposure even in monthly income plans (MIPs).
The idea is to generate stable returns rather than focus on high but volatile returns. One can also consider keeping a significant portion in debt funds because of its easy liquidity.
Additional Reading: 3 Crucial Mutual Fund Tactics For Retirees
Retirement still far off? Well then, it’s time to get cracking and start investing so you can hang up your boots in style! We have a ton of investment options just for you only on BankBazaar!