You may have hung up your boots at 60, but you still need to take care of your financial life after retirement. Having an independent financial life is just as important after retirement as it is in your working years, especially since nuclear families are fast becoming the norm.
To ensure a regular stream of income, you need to deploy your retirement corpus in the the right products. We give you a product line-up to choose from.
Fixed income plans
In the fixed income category, there are four products to choose from: Senior Citizens’ Savings Scheme (SCSS), five-year bank fixed deposits (FDs), Post Office Monthly Income Scheme (Pomis) and annuities, pension products that give a periodic stream of income, offered by life insurance companies. Since none of these instruments offer a tax break on the returns, the way to prioritize them is in the order of decreasing returns.
Bank FDs: In the current scenario, FDs top the list. For instance, IDBI Bank Ltd is offering senior citizens 10.25% per annum on FDs with tenors of 5-10 years for contributions up to Rs 1 crore. Interest on an FD is payable quarterly, but you can stagger your investments in FDs to ensure a monthly stream of income. Says Suresh Sadagopan, a Mumbai-based financial planner: “Most FDs offer interest on a quarterly, half-yearly or annual basis. A quarterly basis should be good enough for most people. If they really want it on a monthly basis, they could stagger the investments over three months so that they get interest every month.”
SCSS: This is your next best bet. It gives you an assured rate of 9% per annum for five years, which can be extended by another three years. SCSS has been a favourite among financial planners for a long time and is almost a must-have for senior citizens seeking regular income.
However, the product may change if the recommendation of the committee headed by Shyamala Gopinath, former deputy governor, Reserve Bank of India, is adopted. The panel has proposed to make instruments falling under National Small Savings Scheme, barring the post office savings deposit, market linked in a controlled manner. For SCSS, the panel has proposed the rate of interest be benchmarked to rates of government securities of similar maturity with a mark-up of 100 basis points. As a rule, compare SCSS and FDs.
Pomis: This offers a return of 8% per annum, payable monthly. It adds a bonus of 5% on the principal amount taking the net yield to 8.9%. However, you would get more in FDs and SCSS.
Annuities: These products look attractive, but they are still under-developed in India.
Annuity products are mostly available through pension plans. You invest in a pension policy and on maturity you use the corpus to buy an annuity. Only few insurers offer immediate annuity products, which you buy from ready corpus.
Currently annuities offer about 5-8% depending upon the annuity option you have chosen. The rate gets fixed for the term and you can’t revisit your investments.
For income after retirement, you can look at some other products that do not guarantee an income stream, but are effective income-generating vehicles.
Non-convertible debentures (NCDs): In the current scenario, non-convertible debentures or NCDs have become popular with financial planners. NCDs are bonds issued by companies wanting to raise money. Though the year 2011 saw many NCD issues, there is only one option in the primary market, where you buy directly from the company. Religare Finvest Ltd’s NCD will hit the market on 9 September.
However, a word of caution: NCDs are not risk-free products. The risk is determined by the credibility of the companies issuing them. Says Sadagopan: “The risk profile is higher, but it is safer than a company FD in the order of a claim in case the company is liquidated. But in order to pick a good NCD one needs to look at the operation of the company. Good cash flow and low non-performing assets are other parameters that one can look at. Also, look at the credit rating.”
Monthly income plans (MIPs): You could also consider monthly income plans offered by mutual fund companies. MIP is a misnomer as dividend payout is not guaranteed. Dividends, if any, are payable yearly, quarterly or monthly, but the returns from MIPs can give a boost to your portfolio.
Says Harbinder Singh Mehra, a Delhi-based financial planner: “Dividend payments either through a portfolio of direct stocks or through MIP should be part of one’s retirement portfolio as it gives just that extra edge in returns. I recommend that 15-20% of one’s retirement income portfolio must consist of either a dividend-paying portfolio of stocks for risk-taking senior citizens or dividend-paying MIP for moderate and conservative risk profile investors as MIPs generally has 75-80% of its money in debt and the rest in equity and cash.” Refer to our Mint50 list of recommended funds to take your pick from the MIP basket.
Fixed maturity plans (FMPs): FMPs invest largely in fixed income securities such as certificate of deposits (CDs), commercial papers (CPs), money market instruments and corporate bonds. These are available for tenors ranging from three months to three years.
Unlike an FD which gives a definite rate of interest, FMPs cannot assure returns as per rules laid down by the capital market regulator, Securities and Exchange Board of India.
But the advantage in an FMP is that long-term capital gains tax for holding it more than a year is 10%, without indexation, and 20%, with indexation benefit. So for senior citizens in the higher tax brackets, FMPs are a good bet.
For asset-rich-cash-poor senior citizens, the reverse mortgage product is an effective post-retirement investment vehicle. Here the bank keeps your house as collateral and pays you the value of your house in equated monthly instalments.
Although technically the bank owns the house, you can live in it till you and your spouse are alive even after the reverse mortgage term gets over. On death, the bank can sell the house. But the first offer for sale is made to the legal heirs of the borrowers. If the heirs are not in a position to buy the house or do not want to buy a house, the bank sells the house to a third party and pays the difference, if any, to the legal heirs. Says Sumeet Vaid, a Mumbai-based financial planner: “Reverse mortgage is an excellent retirement vehicle since you are able to generate an income from your house. Also, since any capital appreciation is passed on to your legal heirs, it also partially takes care of estate planning.”
But your financial worries are not just limited to ensuring a periodic stream of income. The risk of living too long and reinvestment risks are two potential threats to your personal finance. Remember the interest that a regular income vehicle fetches gets paid out as regular income and what you get back in your hands on maturity is the principal. That principal will fetch you less than what it could have, say, five years back, owing to inflation.
It is for this reason that you should reinvest a part of your retirement corpus. You need to give a kicker to your retirement corpus to stay afloat. Says Sadagopan: “Investments in income-bearing instruments should be at a level which can take care of regular expenses. Broadly, a senior citizen should keep 25-40% of his retirement corpus in growth assets to ensure that the corpus does not get over before his/her lifetime. The amounts invested in growth assets should be treated as a long-term corpus as they tend to do well over time.”
For risk-takers well diversified mutual funds, index funds or exchange-traded funds are good options. For conservative to balanced investors, a 10-15% exposure in equities is recommended.
Illustration by Shyamal Banerjee/Mint.