A person should be aware as to how to allocate the available money among various assets to generate a decent return , so as to maintain a healthy lifestyle during retirement. Ideally, investment should be spread across several asset types to meet the regular income requirements.
Mentioned hereunder are some pointers that should be kept in mind when managing a post retirement corpus and aiming for optimal asset allocation for the same :-
- Portfolio should be a mix of debt and equity, and risk level should be low
As a thumb rule, retirees must have an asset allocation which is based on their needs and not age. Even if one is over the age of 60, it is fine to have some equity allocation because not all money will be required for expenses in the coming few years. Thus one may invest the income required in the initial 5-6 years in fixed deposit/ debt funds etc, with the remaining amount being allocated to equity-oriented mutual funds. After every five years, reallocation of equity to debt can be done in order to generate income and rebalance one’s portfolio.
Financial planners suggest that one must be careful with risks as one approaches retirement or is retired. Cutting down on direct exposure to equity and making debt investments for regular income can be one of the main pillars of a good asset mix.
- Investing in Equity and limiting equity exposure to 20-30% of portfolio
Equity, as per several financial planners, are indispensable for every investor, young or old, as they are the only asset that can beat inflation over long periods . Besides having allocation towards safe debt products which caters to regular cash flow requirements, one should have equity-oriented investments, too. But many seniors are apprehensive of taking risk with their retirement corpus and lose out on better inflation beating portfolio returns by not investing in equity.
- Invest in instruments that beat inflation on a post-tax basis
A big challenge for retirees is to keep ahead of inflation. Many times unknowingly, people make the mistake of not investing in instruments that beat inflation, on a post-tax basis. As a result, their income becomes insufficient after a few years with rising living costs. Retired people often don’t think about inflation-adjusted returns and are sceptical of falling markets and interest rates, but it is a cycle and it (rate increase and decrease) changes every 5-7 years.
- Investments with long lock-in periods should be avoided
Post retirement, medical expenses become a part of regular monthly expenses. Other expenses are those due to vacation, motor insurance and home equipment depreciation and replacements etc. So some money should always be readily available. However, many people in order to keep their accumulated money safe , tend to go for long-term schemes. This in turn affects liquidity. Thus, investments with long lock-in periods should be avoided.
- Have a contingency fund for emergencies and health check –up
The need of regular income flow/Ways to generate regular income during retirement
For many people in India, the source of income after retirement is either pension received from the government (in case of government service), pension products bought from insurance companies or pension from fixed income instruments like FDs or bonds. However, given the current inflation scenario, these types of pension are not sufficient to take care of the retiree’s needs. Also, as many people in the retirement age bracket stop earning, it becomes a priority to ensure a source of regular income and have investments that are more liquid to meet any untoward emergency.
It is thus, necessary to create a pension portfolio which will generate income that will pay them sufficiently, every month over the coming years. Here are some of the ways one can create a steady flow of income post retirement:
Systematic Withdrawal Plan(SWP)
One of the best ways to ensure regular income post retirement is to invest in mutual funds and opt for Systematic Withdrawal Plan (SWP). SWPs are reverse of SIPs and allow investors to withdraw a fixed amount from their investments every month – the remaining stays invested. The usage of the portfolio becomes more efficient and there is lower tax impact due to the SWP effect. SWPs enable retirees to generate a monthly income in order to meet various post-retirement expenses.
Retirees can consider shifting accumulated corpus to less risky investments such as debt mutual funds and implement SWP facility. The withdrawal must be planned in such a way that it increases every year with inflation and it does not deplete the corpus too quickly. The withdrawal amount should be calculated in a way so that the life time of the corpus is more than the life expectancy of the investor and the spouse.
Public Provident Fund (PPF)
PPF is also one the financial product which gives EEE (exempt-exempt-exempt) tax status. It basically means that at the time of investments the interest earned, and maturity amount is all exempt from tax. It has a lock-in period of 15 years – so if investors invest for the entire term, the power compounding works it’s effects on the earnings for them. Even though it has a lock-in period of 15 years, it offers partial liquidity through loans and partial withdrawals.
PPF being, a very long-term saving tool with complete tax benefits is a must-have product in the retirement’s pension income portfolio while planning one’s pension income.
New Pension System (NPS)
NPS was designed to bring a greater number of people into the pension network after retirement. Individuals can claim an additional deduction of up to Rs 50,000 under Section 80CCD (1B), which is in addition to Rs 1.5 lakh permitted under Section 80C. At the time of retirement investors can withdraw 60% of the money which will be taxable in that year and remaining 40% should be compulsorily bought for an annuity which is again taxed yearly as per the individual’s IT slab.
NPS is market linked scheme and returns are based on the performance of the funds that investors choose. There are around eight pension fund managers to choose from and within that, investors have an option to invest in government bond fund, corporate debt fund or equity.
Insurance companies offer retirement plans giving the benefits of both insurance and investment which offer regular income to people after retirement.
These are Annuity Plans in which one invests a lump sum and gets a stream of income at regular intervals until death or the end of tenure. The payout can be monthly, quarterly, or semi-annually. The corpus at the end of the accumulation phase will be paid out in two parts—one-third as lump sum, with the remaining being converted into annuities. Upon the death of the annuitant, there is a death benefit in the form of a return of purchase price (excluding taxes).
However, as the interest paid is locked for life, it fails to beat inflation with time.
Annuity investments can be a good option to form a part of the portfolio to cover longevity risk. But considering that the returns are taxable and does not adjust for inflation, annuities should be only a small portion of the portfolio.
Fixed income instruments
Fixed Deposits are good for fixed and assured regular income. FDs yield better results when money is saved over a longer duration. FDs issued by Banks, large private companies and PSUs have an AAA rating. This makes it a very good part of the debt portfolio.
Senior Citizen Saving Scheme (SCSS)
Senior Citizen Savings Scheme (SCSS), meant only for the retired, is a government guaranteed scheme where one can deposit anywhere between Rs.1,000 and Rs.15 lakh and earn an interest of 8.7% (Q3) per annum. It has a lock-in period of five years that can be further extended by three years. The investment is exempt from tax under section 80C of the Income-tax Act, 1961, but the interest payment, paid quarterly, is taxable.
Retired life is supposed to be the golden period of one’s life, and if the money investment and management part is done properly, one can enjoy it well. When investing, one should see if the returns are taxable, whether they are growing to beat inflation and how easily he/she can access the money when needed. However, one should not take risks without understanding the product and may consider taking advice from an expert financial planner in this regard.
Debalina Roy Chowdhury