Retirement planning should aim to provide you with the same lifestyle you lead during your working life even after the regular salary income stops. For this, you need to plan for your income flow post-retirement well on time.
“For much of the present generation in India nearing retirement, the source of pension is either actual pension received from the government (for their service), pension products bought from insurance companies or self-generated pension from fixed income instruments like FDs or bonds. In the current inflation scenario of the country, these types of pension are not likely to be sufficient to take care of the pensioner or retiree. We advise investors to custom-create a pension portfolio made of a pool of diversified mutual funds and structure a ladder of income that will pay them sufficiently, every month over many years to come,” Amar Pandit, Founder and Chief Happiness officer at HappynessFactory.in
Here are some of the ways you can create a steady flow of income post retirement:
Mutual fund schemes
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 at regular intervals. They also enable investors to spread out accumulated wealth over a time period, so that the retirees are able to generate a monthly income in order to meet various post-retirement expenses. Since most retirees’ risk appetite reduces post-retirement, they can consider shifting accumulated corpus to less risky avenues such as debt mutual funds and implement SWP facility.
Manish Kothari - Director & Head of Mutual Funds, Paisabazaar.com said that SWPs are more tax efficient than traditional investment avenues such as FDs, with the latter’s interest income being taxable as per the investor’s tax bracket, implying that it can be as high as 30%. “Remember that if you invest in equity funds, short-term gains tax at 15% would be levied if redemption is done before 12 months, whereas a long-term capital gains tax is applicable on gains over and above Rs.1 lakh, at the rate of 10%. Or, even if you invest in debt funds, you would only be taxed 20% after taking into account the indexation benefit, if you do not redeem them before 3 years,” he added.
Public Provident Fund (PPF)
Till a few months back, investments from equity were tax-free after one year. But with changes in taxation structure, 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. Even as interest rates have fallen in the past few years, PPF still remains one of the sought-after tax saving instruments in India. As it has a lock-in period of 15 years and if investors invest for the entire term the magic of compounding does the rest of the earnings for the investors.
Rakesh Goyal, Director, Probus Insurance Broker thinks that investors who directly invest in equities or through mutual fund should have a PPF account for diversification. In financial planning, a portfolio of investors should have exposure to equity and debt along with insurance and gold. PPF can easily be replaced with other debt products like Kisan Vikas Patra and National Saving Certificates (NSC). Even as it has a lock-in period of 15 years, it offers partial liquidity through loans and partial withdrawals. “PPF plays a very long-term saving tool with complete tax benefits which benefit investors. Hence, it should be a must-have product as a part of retirement’s pension income portfolio while planning one’s pension income,” he suggested.
New Pension System (NPS)
NPS was designed to bring a greater number of people into the pension network after retirement. The product has an additional tax benefit of Rs 50,000 under 80CCD of IT Act allows investors to get benefits above Rs 1.5 lakh in 80C of IT Act. “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,” said Goyal.
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 cum-pension income plans
Insurance products like retirement plans offer benefits of both insurance and investment. These plans are also known as Annuity Plans which offer regular income to people after retirement. There are different types of pension plans where the immediate annuity is paid. A policyholder has to make a one-time investment in lump-sum to receive a regular pension for the rest of their lives. The payout can be monthly, quarterly, or semi-annually.
Santosh Agarwal- Associate Director and Cluster Head- Life Insurance, Policybazaar.com said that upon the death of the annuitant, there is a death benefit in the form of a return of purchase price (excluding taxes). “Also, there is guaranteed surrender benefit equal to 10% of the purchase price (excluding taxes). The paid value depends upon the prevailing market conditions,” she added.
Fixed income instruments
Fixed Deposits are ideal for investors looking at fixed and assured regular income. FDs use the power of compounding to yield better results when money is saved over a longer duration. To give an example, when you save Rs.100 and get an annual interest of 10%, you will have Rs.110 at the end of one year. Due to compounding the next year you will get a 10% interest on Rs.110, which will then leave you with Rs.121. The next year, interest will be calculated on Rs.121 at 10% and so on. In time, these savings will grow exponentially. This is how FDs help you increment your savings.
Adhil Shetty, CEO, Bankbazaar.com said that FDs are a very secure long-term investment. They are classified and segregated based on the overall safety of the initial capital invested. “Usually, FDs issued by Banks, large private companies and PSUs have an AAA rating, meaning there is little likelihood that your investment will do badly. This makes it a very good part of the debt portfolio. Therefore, to create a safer pool for your investment so as to get pension income during retirement, you should make some investment in fixed deposits,” he added.