Life begins at 60! After a long career, you are finally looking pleasurably at retirement, at beginning a new phase. But as you adapt to retired life, the one key task you face is generating a regular income from your savings, especially as there would be no more salary inflows.
As interest rates harden in light of the high inflation currently prevalent, it is all the more important to invest your corpus in such a way that your kitty doesn’t get eroded.
Here’s how you could go about this vital task.
Before getting into the avenues for investing and also deciding the asset allocation itself, it is important to set a few assumptions in place.
- You have ₹1 crore as retirement benefits.
- There is no pension income that you receive.
- We assume that you already have your own medical insurance policy with sufficient coverage — not the one given by your last employer — that also covers your spouse
- You have already repaid all your loans and have no liabilities
- There are no major pending financial obligations such as on child’s college education or marriage. Even if any of these is pending, we assume you have made provisions for those separately.
This is not a commentary on whether ₹1 crore is enough for your retirement, but an asset allocation exercise to optimise your portfolio returns. without taking too much risk.
First, you must allocate ₹10 lakh as an emergency fund. This can be held in any liquid or money market fund (Aditya Birla Sun Life Money Manager and SBI Savings). You could also choose to keep the amount in your savings account in a bank that offers higher interest for maintaining large balances. Our choice would be IDFC First Bank. The key factors of investing in these are safety and liquidity, and not return maximisation.
Given that this is an emergency fund, it must be used only in the case of exigencies. It must be replenished if there is any withdrawal.
Next, some part of the portfolio must go towards equities even after retirement. We suggest 20 per cent at least. So, set aside ₹20 lakh for equity investments.
You can choose large-cap index funds and aggressive hybrid mutual funds for the purpose.
Our choices would be the UTI Nifty 50 Index Fund and ICICI Prudential Equity & Debt Fund. The large-cap and aggressive hybrid, as categories, have delivered over 13 per cent returns over the past 10 years.
Even if we assume 10-odd per cent returns over the long term, your investment would double every seven years.
You can take out profits over the long term and just retain your original investment amount in these funds. These profits can be redeployed in suitable fixed-income options.
You can stagger this ₹20-lakh investment over a period of 1-2 years.
That leaves ₹70 lakh for generating your regular income. Here are six avenues for you to deploy the amount.
Regular income options
In deciding the avenues, we have taken the safety aspect into consideration. The threshold for returns has been set at 7 per cent — only those investments offering higher than this level of return have been considered.
Senior citizen savings scheme (SCSS)
The SCSS is a great vehicle for the retired. It is an extremely safe investment option and is made available largely to those who are 60 or above. With some conditions, entry at 55 is also allowed. The SCSS is like a fixed deposit with assured returns.
The interest rate on offer is 7.6 per cent a year. Interest payments are done every quarter. The interest rate is reviewed every quarter by the government.
You can open an account in your neighbourhood post-office. ICICI Bank, State Bank of India and Bank of Baroda among a few others also offer the SCSS account. But you will have to visit the bank branch physically as there is no facility to open it online.
The maximum amount you can invest in an SCSS account is ₹15 lakh. We suggest that you utilise the full limit and invest ₹15 lakh in it.
At 7.6 per cent, you would receive ₹28,500 interest each quarter. These payments are generally made on the first of January, April, July and October each year.
The SCSS account runs for five years. You can extend it for another three years upon maturity, which can be done only once.
Investments up to ₹1.5 lakh qualify for deduction under section 80C of the Income Tax Act.
The interest earned is added to your income and taxed at the applicable slab.
Premature closure is allowed with penalties. No amount of interest is payable if you withdraw within a year of opening the account. If you want to withdraw money between years one and two, 1.5 per cent of the principal amount is deducted as a penalty. For years 2-5, withdrawals are penalised with 1 per cent of the principal amount being reduced and the balance is paid out.
Pradhan Mantri Vaya Vandana Yojana (PMVVY)
It is a policy introduced by the government and run by LIC for providing pensions to those aged 60 and above. The scheme, which was launched in 2020, has been extended till March 31, 2023. It is a non-linked, non-participating scheme that the government of India subsidises. The interest rate on offer is 7.4 per cent a year.
The scheme mostly works like a deposit with periodic payouts. You can invest up to ₹15 lakh ( ₹1,448,086 plus taxes) in it.
We suggest you invest the entire ₹15 lakh in it. For this amount, you will get an annual pension of ₹111,000 or ₹76.6 for every ₹1,000 purchase price ( ₹1,448,086).
Monthly, quarterly and half-yearly payouts are also available.
The investment is for ten years. At the end of 10 years, you get back the purchase price. If there is any unfortunate occurrence before 10 years, the purchase price is given to the nominee.
The interest paid by the scheme is fully taxed at your applicable slab. There are no tax benefits or deductions available with this scheme.
You can close the account prematurely only for exceptional reasons, such as treating any illness for yourself or your spouse. The surrender value is set at 98 per cent of the purchase price.
Fixed deposits of top NBFCs
After the hike in the repo rate from May this year, many non-banking financial companies (NBFCs) have increased the interest on their deposits. They come in varying tenures. Bajaj Finance and HDFC offer senior citizens the best rate at 7.85 per cent (44 months) and 7.75 per cent (45 months), respectively. These are for the yearly payout options of the deposits.
Both the above deposits carry the highest AAA credit rating. So, timely payment of interest and principal is assured. You also can take monthly, quarterly, or half-yearly interest payouts on these deposits, but the rates are a tad lower.
You can allocate ₹10 lakh — ₹5 lakh each to the deposits of Bajaj Finance and HDFC.
You will get an annual interest payment of ₹78,000 by investing in these two deposits.
As with other options, the interest is taxed at your applicable tax slab.
Government securities (g-secs)
Retirees can also consider government securities or bonds. Many government bonds are traded with ample volumes. They can be bought via the RBI Retail Direct portal. They are the safest investments, given that government securities carry no credit risk. As they are guaranteed by the sovereign, you are sure to get the interest payouts.
As interest rates increased over the past several months, yield of government securities (10-year) touched 7.6 per cent levels. But yields have cooled in recent weeks, given the lower trajectory of inflation and expectations of smaller rate hikes in the future.
These government securities pay out interest twice a year, which can act as a pension for you.
You can consider 07.26 GS 2032, that is available at an yield of 7.28 per cent and the 07.54 GS 2036 that trades at an yield to maturity of 7.43 per cent. There are others with longer maturity, but the yields are only slightly higher and not that attractive.
You must understand the difference between yield and coupon.
The 07.26 GS 2032 will pay a coupon of 7.26 per cent. This will be the rate of interest payout. So, for a ₹10 lakh investment, you will receive a total of ₹72,600 a year in two half-yearly instalments. But the yield is 7.28 per cent because you can purchase the bond at less than the original issue price of ₹100.
Your buying price will decide your yield.
Also, you will get these yields only if you hold the bonds till maturity. You can sell the bonds earlier if you want, but that may result in lower yields for you.
The interest payout on these bonds is taxed at your slab. You will pay capital gains tax on selling these bonds at the rate of 10 per cent if you hold them for a year or more.
You can invest ₹10 lakh in g-secs.
The g-secs that are traded and their prices are available on the Clearing Corporation of India website. If you are savvier, you can also choose to invest in the primary market for g-secs through auctions conducted from time to time through the RBI Retail Direct platform.
RBI floating rate savings bond
The RBI floating rate savings bonds 2020 are taxable instruments.
The interest rate on these bonds is pegged to the interest offered by the NSC (National Savings Certificate). An additional 35 basis points interest is given on these bonds.
Currently, NSC offers 6.8 interest per annum. So, the RBI bonds give 7.15 per cent.
Interest is paid out twice a year — in January and July. These bonds run for a tenure of seven years.
Premature withdrawals are allowed only for senior citizens. The lock-in period is reduced by one year for every slab of 10 years, starting from 60.
The interest paid is taxable at your applicable slab.
You can apply for these bonds at banks such as SBI, Bank of Baroda, HDFC Bank, ICICI Bank and Axis Bank, among a few others. You may have to visit a bank branch to buy these bonds.
These bonds are also available on the RBI Retail Direct platform.
You can invest ₹10 lakh in these bonds for an income of ₹71,500 in two instalments. I
This is a product offered by insurance companies. You pay a single premium (purchase price) and the insurance company pays you a pension for your life. The purchase price is returned to the nominee upon any unfortunate event. The yields (XIRR) offered by most insurers are nothing much to go by. Going by quotes available at Policybazaar, HDFC Life Insurance’s Immediate annuity alone crosses the 7 per cent threshold. It offers 7.07 per cent yield if the annuity were to run for 15 years and close to 7.1 per cent if the timeframe is 20 years. Yearly payouts are considered.
Given that you can lock into the rate for life, you can invest ₹10 lakh in it.
Increasing your payouts
There is always a reinvestment risk – the possibility of having to invest at lower rates once the present option matures – in fixed income investments. Even then, if you are nimble on your feet, you can optimise returns to an extent, without taking much risk. As mentioned earlier, take profits out of your equity investments once every 5-7 years, and redeploy the proceeds in fixed income instruments to and bolster your investment corpus. This will help you get reasonable payouts even if interest rates fall. Besides, if you have been for retirement through mutual funds or have other mutual fund investments made over your working years, you can redeploy these savings in less volatile funds in the debt category such as banking and PSU debt funds or corporate bond funds and initate systematic withdrawal(SWP) from these to supplement your retirement needs. Keep in mind that such withdrawals will be subject to short-term capital gains tax if you start SWPs immediately on investing. Hence move the monies to stable debt funds at least 3 years before retirement You can also tweak the model allocation for Rs 1 crore to include mutual funds SWPs if you have a higher risk appetite.