A big worry for many investors nearing retirement is managing their monthly expenses after they call it a day. Retirement could turn out to be a nightmare if you have not adequately planned for a regular source of income. If you receive pensionsor annuity payments from an insurance plan or have regular cash flows such as rental income, you may have less reason to worry. Otherwise, generating regular cash flow, assuming you do have high savings may be a challenge. For instance, savings stashed in cumulative deposits or bonds may not provide you with ready money until the deposits mature. And even when they do , you might end up putting away the proceeds in your savings account which yields poor returns and depletes wealth rapidly.

Here are a few options to earn reasonable returns and generate monthly cash flows without too much hassle.

Traditional options

Most investors may be aware of the good old Monthly Income Scheme (MIS) offered by the post office. Offering a rate of 8 per cent per annum, this option would pay out interest every month. A bonus of 5 per cent is paid on maturity after six years. However, if your annual income falls within the tax net, then the interest on MIS is subject to tax. An 8 per cent return may thus be reduced to 7.2 per cent (in the 10 per cent tax slab) or even lower on a post-tax basis. Hence, while MIS would be a convenient option you should avoid investing all your funds in this product, given the fact that it may not fetch returns over and above the current rates of inflation (over 8 per cent).

A better option, if you are over 60 years old, would be the Post Office Senior Citizens Savings Scheme (SCS). With interest rate at 9 per cent per annum, the scheme is a better option for many reasons. One, the principal amount invested is available for deduction under Section 80C. Hence, if you have taxable income, investing in SCS would help lower your tax payout. As a result the post-tax yield is good. You can invest up to Rs 15 lakh in this scheme whereas MIS is capped at Rs 4.5 lakh (single account holder) or Rs 9 lakh (for joint accounts). Being able to invest a bulk in SCS will also ensure that you interest payouts are sizeable, especially when you lack other cash flows. Do not be put off by the quarterly interest payout in SCS. You can always let it lie in the savings account at the post office or your bank for a couple of months. Interest though is taxable, and tax is deducted at source if interest exceeds Rs 10,000 per annum. Ensure that you submit Form 15H if your annual income is well below the minimum tax slab.

Deposit options

While the post office schemes are available at all times and interest rates don't change based on market cycles, the current high interest rate scenario has made deposits of banks and NBFCs more attractive. NBFCs with high credit rating such as HDFC, ICICI Bank, Bank of Baroda and smaller ones such as Tamilnad Mercantile Bank offer monthly payout options on their fixed deposits. Interest rates hover around 9.5-10.5 per cent for a 1-3 year period. Yields on a quarterly payout would be marginally superior given the longer duration. Remember, here too, the interest is taxable and TDS laws are same as explained earlier.

Smarter options

The traditional options offer regularity in income but are not necessarily tax efficient or optimal in terms of returns earned. While people with no other sources of income would do well to allocate a majority of their savings in safe options, a fifth of their savings can be parked in savvier options that mutual funds offer. We are not delving in to the universe of equity funds for reasons of high risk.

Mutual fund investors may be aware of Monthly Income Plans or MIPs that seek to offer a monthly dividend payout to investors. These funds predominantly invest in short and long term fixed income instruments issued by government or corporates, debentures and commercial paper. MIPs however, have a 15-20 per cent exposure to equities to provide some kicker to returns. The key limitation here is that dividend amount may vary across months and there is no guarantee of regular dividend payout as gains are linked to interest rate cycle.

Withdraw systematically

So how does one get over the limitation of varying dividend payments and also prevent NAV erosion that happens by way of dividend distribution tax of 13.5 per cent (including surcharge and cess) paid by the debt funds? A good alternative would therefore be a less popular strategy called the systematic withdrawal plan. Almost all fund houses allow you to withdraw a fixed sum monthly, quarterly or half-yearly from any of the debt funds or MIPs on offer. You could either opt to withdraw a fixed sum or alternatively withdraw only the gains made on your capital. All you need to do is to opt for such a scheme at the time of investment or much later. However, here a few points that you should know while investing in SWPs. Do not opt for dividends if you go or SWPs. And, ensure there is no exit load when you start the withdrawal. Exit loads are typically charged within one year of investment. Hence, start investing a few years before you require regular cash flows. Withdrawal after the first year will ensure that you do not suffer short term capital gains. Tax on long term gains would be 10 per cent without indexation or 20 per cent with indexation.

Related Topics
comment COMMENT NOW