Options for Post-Retirement Income Generation
If you’re recently retired with no reliable future income stream in sight other than the ones you’re going to generate from your accumulated investments, you’re probably familiar with the sense of confusion that can abound during this time. Should you stick 100% to risk free assets? Should you only invest into bank deposits? Are Life Insurance policies the way to go? Should you deplete your corpus or aim to keep it constant as the years roll by? These are just a few of the questions that could be passing through your mind right now.
Income generation will likely be at the top of your priority list right now. It goes without saying that you’d like this income to be as steady and tax efficient as possible. Here’s a quick assessment of some of your options for generating post-retirement income.
Bank Fixed Deposits
Banks offer slightly higher returns on their fixed deposits to senior citizens aged 60 and above. The current rates stand at approximately 6.5% to 5.75% per annum for most banks, having come down sharply in recent times. The tax inefficiency and low returns afforded by bank FD’s make them a poor choice for generating post-retirement income.
Bonds
Government Bonds and AAA rated corporate bonds can provide steady returns to retirees. Even some high yielding AA rated bonds may be worthy of consideration, but after consulting a qualified financial advisor. Unfortunately, bonds lock in your money until maturity, and attempting to ‘trade’ it before maturity may expose the retiree to interest rate risk. Retirees would be better off investing into bond funds with moderate maturities ranging from 3-5 years.
SCSS
The SCSS or Senior Citizens Savings Scheme is a 5-year, fixed return investment with a sovereign backing. The retiree has the option of extending the tenure at the end of the 5th year, at the rate prevailing at that time. Unfortunately, the SCCC has a hard cap of Rs. 15 lakhs, implying a maximum possible income generation of Rs. 10.500 per month at the current rate of 8.4% per annum. Interest income generated from the SCSS is fully taxable in the hands of the retiree.
Post Office Monthly Income Scheme
The POMIS is a sovereign backed saving scheme with a fixed interest rate that currently stands at 7.8% per annum. The interest, as the name suggests, is paid out monthly and is fully taxable in the hands of the retiree. The maximum investment limit in the POMIS is just Rs. 4.5 lakh under a single name, and Rs. 9 lakh under joint ownership – implying that a retired couple can generate up to Rs. 5,850 per month from the POMIS. The tax inefficiency and low cap makes the POMIS an incomplete retirement income generation solution.
PMVVY
The recently launched PMVVY (Pradhan Mantri Vaya Vandana Yojana) is a 10-year annuity scheme with a sovereign backing, which is operated solely by the LIC. A retiree can invest between Rs. 1.5 lakhs and Rs 7.5 lakhs in the scheme, for a maximum annual income of Rs. 60,000 (Rs. 5,000 per month). The yield of the product works of to between 8% and 8.3%, depending upon the mode chosen. The income received from PMVVY is unfortunately, fully taxable (just like the POMIS).
Annuities
Annuities issued by private Life Insurers come in all shapes and sizes, and the multitude of options can be confusing. What’s important to note is that annuity returns are taxable, and the gross income would most likely (depending upon the plan and product) range between Rs. 6500 to Rs. 8500 per annum. Although annuities in all fairness do provide the comfort of a lifelong income, their net ‘returns’ under a reasonable lifespan assumption usually works out to a sub 7% number.
Mutual Funds
A well-structured Mutual Fund portfolio can potentially provide an efficient and elegant solution to the problem of post-retirement income generation. Retirees must consider that a 100% avoidance of risk may not be the way to go, and they may in fact take a 10-15% exposure to high growth equity mutual funds, with a long-term horizon, of course. Instead of blindly jumping into MIP’s (whose dividends are taxed at 28.33% at source), retirees would be better off opting for SWP’s (Systematic Withdrawal Plans) from debt mutual funds instead. Doing so would not only ensure a completely predictable income stream, but also create tax efficiencies.
Bottom Line
Retirees must aim to create a well-planned mix of sovereign backed schemes and higher return, tax efficient mutual funds. By fully exhausting the upper limits for the POMIS, SCSS and PMVVY (Rs. 31.5 lakhs), a retiree can create a steady, guaranteed income stream of Rs. 21,350 per month (albeit taxable). The remainder can be invested into a low risk portfolio of Mutual Funds, with the intent of generating capital growth and tax-efficient income through SWP’s.