HOW
TO INVEST RETIREMENT MONEY ?
It is of absolute
importance to invest retirement money carefully. Every paisa of
retirement money invested properly gives huge confidence to the family.
Studying all options available in India to invest retirement money, before
locking it is beneficial.
After retirement, people
do not want to speculate with their money. Instead, they will be satisfied with
slightly lower but predictable returns.
Investment must be low
on risk and shall generate fixed income.
Retirement money is not
with which one likes to experiment a lot. Better is to stick to proven ways of
generating fixed income.
You must have noted that
I am repeatedly using a phrase ‘fixed income’. When it comes to investment of
retirement money, fixed income is the right option.
Retired people consider
inflow of fixed income as their first priority.
There are wealthy
individuals who retire very rich. For such individuals fixed income is not a
priority. They can afford to talk about investment diversification, capital
appreciation, equity investment etc.
But this article is not
for such wealthy individuals.
Majority of retired men
in India has only handful of savings. They are not conversant with investment
options and risks associated with investing. For such people, I will suggest to
consider the options suggested here to invest retirement money in India.
The suggested options
are absolutely safe and still can generate good returns.
They are all tailor made
to generate fixed income.
Step #1: Collect the build-up
corpus
This may look simple,
but it is as important as any other preceding steps.
Quantify and try to
collect all savings that has been accumulated while in job.
To mention few savings;
provident fund, gratuity, fixed deposits, shares, term insurance, cash in
savings account etc.
Here one may also recall
those funds/loans that was gave to the family/friends. This is the time that
the retired person can ask that money back.
It is also a nice time
to consider selling some assets that one thinks must be liquidated to add-up to
the retirement corpus.
Remember, every Rupee
hundred/thousand added to retirement corpus is very precious.
Suppose, ones provident
fund is Rs 30Lakhs, Gratuity is Rs 15 lakhs, Fixed Deposit is Rs 5 Lakhs, Share
is Rs 3 Lakhs & Endowment plan is Rs 3 Lakhs and cash is Rs 2 Lakhs.
Adding up all these
savings, it amounts to Rs 58 Lakhs.
As soon as one retires,
within the first few days itself they must start counting the numbers. Idea is
to quantify how much is the retirement corpus.
Further investment of
this corpus will generate returns in form of fixed income.
Step #2: Estimate the
expense requirement
Count the
daily/monthly/annual expense requirements. Retired people have lower expenses
requirements apart from medical needs. Idea of doing this exercise is to know
exactly how much one need to dig into the retirement corpus each month to manage expenses. One
can never cut the expenses down to zero. No matter how judiciously we save,
there will be some bare minimum expenses. But no matter how low is the expense
requirement, withdrawing money regularly from retirement corpus will ultimately exhaust it. This is where careful
investment of retirement money is important.
To talk about expenses
lets list down few:
Investment will make the
retirement corpus grow just fast enough so that regular withdrawals are
possible without depleting the corpus (as far as possible).
Target is to generate
fixed income without digging into principal amount (retirement corpus). In our
example, adding all expenses, it amounts to Rs 31,500/month.
·
Electricity Bill (Rs
2000/month)
·
Water Bill (Rs
500/month)
·
Society Maintenance Bill
(Rs 2000/month)
·
Internet Bill (Rs
1000/month)
·
Payment to Maid (Rs
2500/month)
·
Cooking Gas (Rs
500/month)
·
Phone Bill (Rs
1000/month)
·
Car Wash (Rs 500/month)
·
Car Maintenance (Rs
1500/month)
·
Car Fuel (Rs 1000/month)
·
Car Insurance (Rs
1000/month)
·
Property Tax (Rs
500/month)
·
Medical Insurance
Premium or savings (Rs 4800/month)
·
Grocery (Rs 4500/month)
·
Vegetables (Rs
2800/month)
·
Milk (Rs 1000/month)
·
Miscellaneous Expenses
(Rs 4500/month)
·
Investment to hedge
inflation (Rs 2500/month)
·
Income Tax (Rs
2000/month)
[Note: These expense has
been considered just as an example. I will request my readers to tune the
values and expense heads as per their needs]
So in our example,
retirement savings is Rs 58 Lakhs and monthly expense is Rs 31,500.
In order to generate Rs
31,500 per month from savings of Rs 58 lakhs, return @ 6.5% per annum is required.
In India, a return of
6.5% per annum is not a very difficult return to generate.
[Note: Please note that
this assumption has been made considering a theory that the priority of retired
person is only fixed income generation]
When yield-requirement
is in range of 6% per annum, the person need not take lots of risk while
investing his retirement money.
The only care one has to
follow is to select the right investment options tailor made for retired people.
Lets talk about how to invest
retirement money in India.
I will suggest the
person to divide the retirement money into seven parts as follows:
1.
Current A/c
2.
Savings A/c
3.
Fixed Deposit
4.
Post Office – Monthly
Income Scheme (PO-MIS)
5.
Post Office & SBI –
Senior Citizen Savings Scheme (PO-SCSS, SBI-SCSS)
6.
MIP offered by Mutual
Funds – monthly dividend plan (MF-MIP)
7.
Balanced Mutual Fund –
for capital appreciation
Lets discuss all options
in details…
[P.Note: For senior
citizens, no income tax is applicable if annual income is less than Rs.3.0
lakhs. But TDS will still be deducted. In this case, while filing the income
tax returns at the end of the month, income tax refund should be claimed. It is
also important to keep all TDS certificate handy while filing the income tax
returns.]
#1. Savings A/c:
Ideally I would like to
park all my retirement money in savings account.
But the problem is, it
is going to pay me returns as low as 3.5% per annum.
Which means, I need a
big corpus to generate a monthly income of Rs 31,500?
Yes, a corpus of Rs
94,50,000.
But the problem is, not
many has such a huge retirement corpus.
In this case we shall
shift to the next best alternative.
If one has a retirement
fund of Rs 58,00,000; interest @3.5% will generate monthly income close to Rs
16,900.
Considering our example,
income generated from savings account is not sufficient (we need Rs. 31,500 per
month).
So, what is best here is
to keep only 12 months worth expense in savings account.
Let’s use savings
account only as a locker which helps to manage ones day to day expenses for
next 12 months.
For making the
retirement corpus grow, let’s use other investment options.
[In our example, fund allocation
to savings account is limited to 1.7% only]
#2. Fixed Deposit:
After savings account,
it is bank’s fixed deposit that is the most preferred option.
It allows one to earn
monthly income without having to take too much risk.
The accrued interest
gets credited to the savings account on a fixed date each month.
If given a chance, I
would personally lock all my retirement money in fixed deposit only.
But the problem with
fixed deposit is, all its interest earned is taxable. Hence, net of tax yield
of FD is also low (net of TDS is 6.08%).
If one has a retirement
fund of Rs 58,00,000; interest @6.08% will generate monthly income close to Rs
29,400.
Considering our example,
fixed deposit is good but good enough to support the expense requirement of the
retired person.
I will keep at least
~16% of my retirement corpus invested in FD.
The balance I will
invest in other retirement friendly options.
Lets consider more
profitable or/and tax efficient investment options.
[In our example, fund
allocation to fixed deposit is limited to 17.2% only]
#3. Post Office – Monthly Income Scheme (MIS)
Monthly income scheme
(MIS) is a very safe investment for retired people. They are tailor made to
generate monthly income for retired people.
The interest rate can be
as high as 7.6% per annum. But there are some major limitations of MIS of post
office.
Number one limitation is
that interest gets credited to linked post office savings account (POSA) only.
Though POSA has cheque facility but it nether has ATM not online banking
services. It means one has to go physically to post office to collect money.
Another limitation of
PO-MIS is that maximum amount that can be invested is Rs 9 lakhs in case of
joint account (with spouse). For single account maximum investment allowed is
Rs 4.5 lakhs.
By investing Rs 9,00,000
@7.6% will generate monthly income close to Rs 5,700.
Irrespective of all
limitations of MIS, PO-MIS must be considered by retired people as one of their
preferred investment option for retirement money.
[In our example, fund allocation to PO-MIS is
limited to 15.5% only]
#4. Post office, SBI’s Senior Citizen Savings Scheme
(SCSS) and LIC Pradhan Mantri Vaya Vandana Yojana(PMVVY)
Senior citizen savings
scheme is another investment option for retired people in India.
Like MIS, in SCSS as
well there are few limitations.
One of the limitation is
related to maximum amount one can keep in SCSS A/c. Maximum amount that one can invest in SCSS is Rs 15 lakhs (joint account with spouse).
To overcome this
limitation of Rs.15 lakhs one can open multiple SCSS accounts in different
banks.
In our example we have
considered two (2) SCSS accounts, one in Post Office and other in SBI.
Almost all public sector
banks offer SCSS accounts. Apart from SBI, other known banks which offer SCSS
are Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Indian
Bank, Vijaya Bank etc.
Only ICICI Bank offers
SCSS account among all private sector banks.
The lock-in period for
the invested fund is 5 years. But this is ok, as invested retirement corpus
shall be touched too often.
SCSS has one very big
advantage. The interest paid by IPO is @ 8.4% per annum. This is higher than
any other monthly income plans in India.
But TDS is applicable on
interest accured in SCSS. Net of TDS return of SCSS is 7.56% (PO-SCSS), 7.74%
(SBI-SCSS).
The interested paid in
on quarterly basis. The interested is credited to savings account opened in the
same post office.
Money invested under SCSS also
qualifies for deduction under S/c 80C.
The pension scheme is
offered by Life Insurance Corporation of India (LIC). In this falling interest
rate scenario, where banks are cutting their deposit rates and the interest
rates on small saving schemes are at record low, experts believe it will
provide senior citizens aged 60 or above an alternative to look at. Here
is all you need to know about the scheme.
1. Under this
scheme, there will be an assured return of 8 per cent over a tenure of 10
years. If there is a shortfall between the actual return earned under the
scheme and the guaranteed return of 8 per cent then the government will
subsidise LIC for it.
2. LIC started
offering the pension scheme since May 4,2017 and it will remain open for the
next one year.
3. One
can invest in the pension scheme through both online and offline mode.
4. Under
the scheme the investor will get the option to choose between the mode of
payment - monthly, quarterly,half-yearly and yearly. There is a minimum and
maximum limit on the investment amount depending on the mode of pension chosen.
For example if a person choses to receive the minimum pension available under
the scheme (Rs 1,000 per month), then he will have to invest Rs 1.5 lakh but if
the person chooses to receive Rs 12,000 annually, then Rs 1,44,578 will have to
be invested.
5. Premature
withdrawal from the scheme is possible in case the money is required for the
treatment of terminal or critical illness of the the person or spouse. In this
case, 98 per cent of the amount invested will be refunded.
6. In
case of the death of the pensioner during the policy term of 10 years, the
purchase price will be refunded to the beneficiary.
7. On
the maturity , the pensioner will get back the amount invested along with the
final installment of the pension.
8. One
can also avail a loan of up to 75 per cent of the amount invested after three
years.
9. With
interest rates moving down, this will be a good option.
[In our example, fund allocation to PO-SCSS
& SBI-SCSS is limited to 51.8% only]
#5. Monthly Income Plan of Mutual Funds (MF-MIP):
Please note that, we are
talking about mutual fund MIP having annual dividend payment option (though
monthy dividend payment option is also available).
P.Note: To generate regular income from
MF-MIP, retired people must subscribe to dividend option and not growth option.
Returns offered by
mutual fund MIP’s are best compared to all other monthly income plans. But net
of dividend distribution tax (DDT-28.84%) makes its yield low.
On an average, a good
mutual fund MIP can yield annual dividend @8.2% per annum. Net of DDT lowers
the yield of MF-MIP to 5.84% per annum.
In our example, we need
investment returns of 6.5% per annum, so MF-MIP is not good enough. Still, I am
considering MF-MIP, why?
There are two reasons,
at times a good MF-MIP can yield even higher returns (more than 8.2% p.a.). On internet we can see MF-MIP
yielding 9% per annum. It means, MF-MIP has
potential to generate higher returns (net of DDT).
MF-MIP has another
advantage. Investing in them allows one to get a small exposure to equity as
well. This is good from point to view of investment diversification.
[In our example, fund allocation to MF-MIP is
limited to 6.4% only]
#6. Equity based BALANCED mutual
fund:
Why I am suggesting a
balanced fund here? It has a equity based portfolio, right? It means it is too
risky for retired people, then why invest here?
No matter how much we
resist, there will always be a temptation to invest our money for earning fast
capital appreciation.
Though for a retired
person, capital appreciation is not a priority, but it is better to keep a
provision for this as well. This is done more to satisfy the urge for earning
higher returns.
In case, our example
person has some extra funds (above Rs.58 lakhs), he can invest this fund in
balanced mutual fund.
[In our example, fund allocation to
MF-Balanced is limited to 0.9% only]
Few other points and information
for those who retire
1.
15H/15G form :
Conditions you must fulfill to submit Form
15G:
1. You are an individual or HUF
2. You must be a Resident Indian
3. You should be less than 60 years old
4. Tax calculated on your Total Income is nil
5. The total interest income for the year is less than the minimum
exemption limit of that year, which is Rs 2,50,000 for financial year 2016-17.
Conditions you must
fulfill to submit Form 15H:
1. You are an individual
2. You must be a Resident Indian
3. You are 60 years old or will be 60 years old during the year for which
you are submitting the form
4. Tax calculated on your Total Income is nil
Salient Features of Main
Investment options after retirement:
1. Post office Senior Citizens Savings
Scheme (SCSS)
·
Features :
·
This is one of the best risk-free
saving option for Senior citizens. Your capital is safe under this scheme.
·
The maximum investment limit is Rs 15
Lakh.
·
The maturity period is for 5 years.
·
The interest income is payable on a
quarterly basis.
·
The rate of return (interest
rate) is fixed for the entire tenure. (Related article : ‘Latest
interest rates of Post office Small Savings Schemes FY 2017-18‘)
·
For example : If you invest Rs 1 Lakh
in this scheme, assuming interest rate @ 8.6%, you can receive around Rs 2,150
every quarter for 5 years.
·
Tax Implications :
·
You can claim the invested amount as
tax deduction u/s 80c (maximum limit is Rs 1.5 Lakh).
·
The interest income is taxable as per
your income tax slab rate.
2. Post Office Monthly Income Scheme
(MIS)
a. Features :
i.
This small savings scheme offers
guaranteed monthly income for retirees / senior citizens. (Any resident
Indian can invest in this scheme.)
ii.
The maturity period of PO MIS is 5
years.
iii.
The maximum investment limit in POMIS
is Rs 4.5 lakh in single account and Rs 9 lakh, if you are investing in a joint
account.
iv.
Though rate of return (interest
rate) is fixed for the entire tenure, it is lower than the interest
rate offered on SCSS.
v.
For example : If you invest Rs 1 Lakh
in this scheme, assuming interest rate @ 7.5%, you can receive around Rs 625
every month for 5 years.
b. Tax implications :
i.
There is no Section 80C tax benefit
on the invested amount.
ii.
The interest income is taxable as per
your income tax slab rate.
3. Pradhan Mantri Vaya Vandana Yojana
(PMVVY)
a. Features :
i.
This is a guaranteed pension scheme
offered by the Govt of India.
ii.
Indian Citizens aged 60 years and
above are eligible to invest in PMVVY.
iii.
The plan is open for subscription
from 04-May-2017 to 03-May-2018.
iv.
The assured return is 8% p.a.
Effective annually yield works out to 8.30% for monthly pension.
v.
One time premium payment of around Rs
1,44,578/- fetches a monthly pension of Rs 1,000 for 10 years. (Related
Article : ‘PMVVY –
Govt’s new Pension Scheme – Review‘)
b. Tax implications :
i.
Pension is a taxable income, taxed as
per your income tax slab rate.
ii.
No section 80c tax deduction is
available.
4. 8% Govt of India Bonds
a. Features :
i.
Guaranteed rate of Interest @ 8% is
offered.
ii.
The maturity period is for 6 years.
iii.
If you opt for non-cumulative option,
interest amount is payable half-yearly.
iv.
There is no maximum investment limit.
b. Tax Implications :
i.
The interest income is taxable as per
your income tax slab rate.
ii.
There are no tax benefits available
on the invested amount.
5. Life insurance Immediate Annuity plan
(Pension Plans)
a. Features :
i.
You can use your retirement corpus to
buy an immediate Annuity plan. (What is annuity rate? – In return
for a lump sum; the money you have saved in your pension pot, an annuity
provider (insurance company) will give you an annual income for the
rest of your life / fixed tenure.)
ii.
Your insurance company may offer you
different options under an Annuity plan. But, kindly note that the more the
flexibility, lower the annuity amount you may receive.
iii.
The yields on annuity products
offered in the market today are in the range of 5 to 9% only. This is low when
compared to other conservative products like Debt mutual funds, Senior citizens
Savings Schemes, Post office MIS etc., You may pick this option, if you do not
want to worry about fluctuating interest rates for the rest of your life (if
you want to avoid re-investment risk).
iv.
For example : LIC’s Jeevan Akshay VI
Pension plan (option -1) offers Rs 8,930 as monthly pension (annuity
amount at uniform rate for life-time) for a 60 year old person on the
purchase price of Rs 1 Lakh.
b. Tax Implications :
i.
Income tax benefit on the
premium (purchase price of Annuity) paid as per Section 80CCC
of the Income Tax Act (Maximum of up to Rs 1.5 Lakh).
ii.
The pension /Annuity amount is
taxable as per your income tax slab rate.
6. Tax Free Bonds
a. Features :
i.
The interest income on these bonds is
exempt from taxation under the Income Tax Act, 1961. These
are usually issued by government-backed entities.
ii.
The rate of interest (coupon) offered
on Tax-free bonds is generally bench-marked against the Govt Securities.
iii.
The maturity period can be in the
range of 10 to 20 years.
iv.
The interest payment option is
generally annual (but depends on the Issue terms & conditions).
v.
The coupon rates offered by popular
Tax Free Bonds during the FY 2015-16 were around 7 to 8%. (Related Article :
‘What are
Tax-free Bonds?‘)
b. Tax Implications :
i.
Interest income on Bonds is
tax-exempt.
ii.
Section 80C tax benefit is not
available.
Bank or Post office Time Deposits may offer you
guaranteed and fixed income, but do note that the interest rates on these
deposits can be lower than all the above options and also the interest income
is taxable. So, you may avoid opting these.
7. Top Lump sum Investment Options with
Low Risk
In case, you can afford
to take some risk (or) can invest a portion of your retirement corpus in
slightly riskier investment options then you may consider below investment
avenues. You can get fixed and slightly better regular income from these
options, but there are associated risks like ‘default risk’ with these options.
You may get attracted by
better interest rates but kindly do not invest your entire retirement
corpus in these investment options and even if you are investing a portion of
your corpus, do consider investing in multiple deposit schemes or Issues which
have good credit rating. Do note that these are not completely risk-free. Types
of such schemes are:
- Secured Non-Convertible Debentures (NCDs)
- Company Fixed Deposits
8. Lump sum Investment options in Hybrid
– Debt Oriented Mutual Funds
You may consider below options
which are tax-efficient (especially if you are in higher tax-bracket) and
if your investment objective is to get better returns with moderate risk.
Kindly note that returns are not guaranteed on Debt mutual funds and you may
lose your capital too.
Under Dividend option of
these schemes, you may not receive the dividends regularly and the quantum of
dividend amount may also vary. If you want to receive fixed and regular
income, you may consider setting up Systematic Withdrawal Plan on
these investments.
Imp Note:
You might have taken a Retirement, but do note that
Taxes and Inflation will keep haunting you, they won’t retire. So, you need to keep
an eye on them. You may have to invest a portion of your retirement corpus in
investment options like Equity oriented balanced funds (or) regular Equity fund
to get better Real-rate of return (inflation adjusted returns).
You need to give importance to both nominal rate of
return and real-rate of return. The nominal rate of return gives you an idea of
how your money/investment is growing, while the Real Rate of Return tells you
how much your purchasing power is growing. The real-rate of returns is a very
important factor to watch out for during the ‘Withdrawal’ stage of your
retirement.
To get regular income, you may have to set up SWPs
on these investment options. Kindly be aware of the tax implications as well,
as SWPs are treated as normal redemptions.
Important Points to ponder over
When you are devising a plan to invest your
Retirement corpus, you may kindly keep in mind of the below points / factors ;
- If you are totally dependent on the income generated
by your Retirement corpus, do give high priority to protection of capital
and consider options that can give you fixed and guaranteed regular
income.
- If you can afford to take some risk, do
consider an option like Systematic Withdrawal Plan of Debt mutual Funds,
as this can be a better rewarding one and can be a tax-efficient option.
- As much as possible, be aware of the latest
schemes (if any) offered by the Govt for Senior Citizens.
These schemes generally offer interest rates better than the prevailing
market rates. (Also, the company fixed deposits / NCD Issues may
offer higher & special interest rates for senior citizens)
- Watch out for maturity period / lock-in period of your
investment options, whether they are in-line with your requirements or
not. Be aware of the pre-mature withdrawal options and penalties (if
any).
- If you can afford to take risk, do not
hesitate to invest at least a portion of your retirement corpus in
investment options that can beat the inflation rate.
- In case, you have taken an early retirement,
do devise your investment mix with right products as per your financial
goals, investment objectives and time-frame.
- Do not ignore buying a new / continuing your
existing Health insurance cover. Kindly maintain sufficient ‘emergency
fund‘ to meet any unforeseen contingencies.
- Try to diversify your investments. Do not invest
heavily in one investment scheme.
- Last but not the least, write a WILL, so that your Assets are transferred to your
beloved ones as per your will and wish.
You may take retirement, but
taxes, inflation & expenses will be there to deal with….so be active in
managing your finances..enjoy worry free retirement with good health and spend
time with your beloved ones…Personal finance is more personal than it is
finance, plan as per your investment requirements!
Conclusion
Essential is to finalize
how to distribute ones retirement corpus so as to generate net investment
return of 6.5% per annum.
The same can be
established by distributing funds as shown in above graphics.
The wiser will be the
fund distribution (low risk, just-enough returns), more peace will be bestowed
on the retired person.
It is important to lock
our savings. Locking savings means investing it and not keeping it free in
savings account. If this is not done, the money gets spent needlessly.
But for retired people,
investment cannot be done anywhere. It is essential to invest only in those
options which are tailor made for retired people.
What I suggest here is
that, one must prepare an excel sheet for self, similar to what is shown in
the above graphic.
Idea of this excel sheet
should be to play with the numbers. Distribute your retirement funds in such a
way that your monthly income requirement is met.
The proportion of fund
distribution shown in above graphics is just for an example. Depending upon
ones “retirement corpus” and “expense requirements“, one must the fund distribution
to generate enough income.
You may take retirement, but
taxes, inflation & expenses will be there to deal with….so be active in
managing your finances..enjoy worry free retirement with good health and spend
time with your beloved ones…Personal finance is more personal than it is
finance, plan as per your investment requirements!
For sure the returns
will be less, but at least the corpus will be safe.
There is nothing more
important in old age than good health and peace of mind.
Have a happy investing.
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