For most Indians, retirement signifies the end of earning a salary. Therefore, the most important financial goal that they have is to keep the tax liability as low as possible and earn a regular passive income from their investments. The challenge is to make sure that while their investments are safe and draw a fixed income, they should also be able to generate enough returns to last at least 20 years. This is assuming one retires at 60 years of age and the life expectancy is 80 years.
Listed below are some investment options that should be a part of the investment portfolio of any retiree.
SCSS is arguably the first choice for most retirees. Anyone over the age of 60 can avail this scheme either at a post office or a bank. Early retirees can also avail this scheme if they do so within a month of receiving their retirement funds. This scheme has a tenure of five years and can be extended by another three years on maturity. The funds saved under this scheme currently earn an interest of 8.6% per annum, paid out every three months. The interest is considered part of your income and is taxed based on the tax slab you fall under. That said, the investment earns tax benefit under section 80C of the Income Tax Act. The largest amount one can invest in SCSS is ₹15 lakh, and the funds can be withdrawn before the tenure is complete, if needed. This is a safe investment option as the capital and the interest carries a sovereign guarantee.
POMIS is a saving scheme with a 5-year tenure and monthly interest payouts. Investment in this scheme is capped at ₹4.5 lakh for individuals and ₹9 lakh when operated jointly. Funds deposited in this scheme earn interest at 7.8% per annum at the moment. This scheme does not earn any tax benefits.
Instead of collecting the payouts every month, one can choose to automatically deposit the same in a recurring deposit. Another option is to have it credited to a savings account every month.
While bank FDs earn a lower interest than SCSS and POMIS, they still continue to be a popular choice for the retired because of the ease of operation. An additional benefit is that tenure of deposit is much more flexible. The interest rate offered on FDs varies from bank to bank and is around 7.25% currently.
The flexibility in tenure allows one to create a ladder of FDs with different lock-in periods. An investor can choose to create, for example, 10 different FDs with maturity period varying from one year to ten years. At the end of the first year, the payout from the matured FD can be reinvested into a 10 year FD. This ensures that funds are closer to liquid and re-investment risk is low.
FDs with a maturity period of at least 5 years are eligible for tax deduction under section C. However, the interest earned is taxable. To take the benefit of the tax deduction, it is necessary that the FD is not prematurely withdrawn before the 5 year period is completed.
With the life expectancy increasing retirees have to worry about at least two decades of life without earning a paycheck. Add to it the inflation seen in the economy, and the fear of the monies running out seems very real. One of the ways to tackle it is through making an investment into equity mutual funds early in the retirement years.
The reason for this is simple: when adjusted for inflation over a longer period of time, share market (share market) outperforms almost all other investments. This said, retirees should stay away from sectoral, mid- and large-cap funds as the returns from them could be volatile. Ideally, the portfolio should be a mix of large-cap MFs, balanced funds and monthly income plans. At this stage in life, stable returns are far more important than volatile high returns.
Debt MFs are a good choice for anyone in the highest tax bracket. This is because the interest earned on such investments attracts a lower tax rate (20% after indexation) compared to bank deposits. The other benefit of debt MFs is that they are easy to liquidate.
Tax-free bonds are typically issued by government-backed institutions and have the highest safety ratings. These could be a good addition to a retiree’s portfolio as they carry a reasonably high tax-free interest. One can invest in the same through stock exchanges.
A few points to keep in mind when investing in tax-free bonds:
These are long term investments and are tax-free only if held till maturity. So, invest in them only if you are sure you will not need the monies before the tenure is completed.
These bonds are highly illiquid as the volumes traded over stock exchanges is generally low and you may not be able to exit your position in a hurry.
The interest is paid out annually. This means you cannot rely on tax-free bonds for regular monthly income.
Retirees could invest in annuities through life insurance companies for a guaranteed income for the rest of their lives. The pension is typically 5% to 6% of the corpus per annum and is taxable. The corpus is never returned to the investor in such schemes. This could be a good option for someone who does not want to spend energy on building an investment portfolio. But the low interest rates keep most capable investors away.
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