Personal Finance

Asset allocation for retirement income

Deepesh Raghaw | Updated on October 24, 2019

A judicious mix of fixed-income instruments and equity investments can help meet the expenses in the silver years

‘S’ retired last year. He has no liabilities. His kids are well-settled and are not dependent on him. He got his provident fund dues two months ago.

S has no other source of income. He has never invested beyond the comfort of fixed deposits, LIC insurance plans, real estate and mandatory provident fund investments. His LIC policies have all matured. He owns no real estate expect for his residence.

He will get a pension of around ₹30,000 per month from this employer for life. He has never invested in equity mutual funds or direct equity in his entire life. His total investment corpus is ₹1.2 crore. He wants to generate monthly income from his investments.

S and his wife are senior citizens. He expects his expense to be around ₹70,000 per month. He has accounted for travel, insurance, repairs, etc, in his monthly expense.

S gets a pension of ₹30,000 per month. Therefore, in the first year, his other investments must at least provide him a monthly income of ₹40,000 per month.


Being a senior citizen, he gets access to a few good interest-bearing products such as SCSS (Senior Citizens Savings Scheme) and Pradhan Mantri Vaya Vandana Yojana (PMVVY).

SCSS locks in the interest rate for five years. The current interest rate is 8.6 per cent per annum. He can invest a maximum of ₹15 lakh in the SCSS account. The interest is paid on a quarterly basis. Even though he needs income on a monthly basis, the timing mismatch can be easily handled by keeping some cash in his account. There will be tax deducted at source (TDS) at 10 per cent on the interest income. The excess tax paid, if any, will be refunded after filing the income tax returns.

PMVVY locks in the interest rate for 10 years. The current interest rate is 8 per cent per annum if you opt for monthly income. There is no TDS implication.

S can put ₹15 lakh in SCSS. Similarly, he can put ₹15 lakh in his wife’s SCSS account. The interest income in his wife’s account can be clubbed with his income while calculating taxes. That’s a total of ₹ 30 lakh in SCSS accounts. This will give the duo an income of ₹64,500 per quarter, almost ₹20,000 per month after accounting for TDS.

He can invest ₹15 lakh each in his and his wife’s name in PMVVY. This will fetch them a monthly income of ₹20,000.

SCSS and PMVVY, along with pension from his employer, will provide enough for monthly requirements for the first few years. S won’t have to dip into his principal to fund retirement expenses.

We have not accounted for increase in expenses due to inflation. S needs to assess the inflation he will experience. To account for inflation, he can put ₹10 lakh in a fixed deposit or a liquid fund. He can withdraw from this FD or liquid fund if his income from employer pension, SCSS or PMVVY is insufficient to meet inflation. However, he needs to exercise discretion when he draws from this corpus.

As S grows older, especially when he is around 70, he can consider purchase of annuities without return of purchase price. The higher income from annuity plans will potentially help counter inflation. It will also lock in the interest rate for life and reduce longevity risk. The annuity purchases can be staggered.

S must put away ₹25 lakh in a cumulative fixed deposit or a liquid/debt fund to meet any financial or medical emergency. This corpus needs to be big since hospitalisations and medical treatments can be expensive.

Moreover, he does not have the ability to replenish this corpus. When you don’t know when the funds will be needed, a debt mutual fund can provide better tax-efficient returns. At the same time, debt mutual funds are riskier than bank fixed deposits.

Equity investments

Additionally, since the retirement period can be long, we suggest that he start getting comfortable with growth assets such as equities.

Equity investments will be useful to counter inflation over the long term. He can put ₹25 lakh in liquid funds or high credit-quality ultra-short or low-duration funds and route investments into equity funds by way of systematic transfer plans (STPs).

S is a new investor. Therefore, he can pick up a large-cap index fund and an aggressive hybrid equity fund. He can start with STPs of ₹10,000 each in the two funds. If debt fund investments make him uncomfortable, he can put this money in a fixed deposit and use his monthly interest income to invest in the equity funds.

Through his investments in SCSS and PMVVY, we can be reasonably sure that he won’t have to touch this money in the next 10 years. Therefore, he can think long-term with this money.

Financial plans can’t be static and need to be revisited and adjusted as the requirements or the information changes. This is especially important for retirees since they do not have any major cash inflows and rely on investments to generate regular income.

Expense pattern may keep changing for various reasons. Asset allocation may have to be tweaked. Tracking expenses is very important.

We could have put all the money in, say, a 50:50 equity:debt portfolio and drawn from that portfolio. However, in our opinion, the investor, given his investment experience, is more likely to stick with the investment plan as discussed above.

The writer is a SEBI-registered investment advisor at

Published on October 24, 2019

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