Jitendra PS Solanki
JS Financial Advisors
Risk of longevity is a much higher risk than any other you experience. The retirement years can be really painful if you haven’t made sufficient provision for it. Similarly, Investing during your retirement years is as important as accumulating for it. If your retirement funds are not growing enough, you can always fall short of your requirement in later years of life.
But choosing an investment option is again a difficult proposition for retirees. Since the larger concern during this period is the safety of money, there is a higher search for options which can provide fixed income without taking a risk.
Also read: Should you sell out your fixed income portfolio
However, even fixed income alternatives have their risk and return characteristics. So it’s wiser to understand them and analyze to match the viable options with your requirement.
Here I have discussed fixed income options which are available to retirees and where they benefit -
1. Senior Citizens Savings Scheme
This scheme is specifically for senior citizens who have reached 60 years of age or 55 years if taken VRS. Here one can deposit up to Rs 15 lakh – single or jointly and the scheme runs for five years period.
The benefit of SCSS is that the interest is paid on a quarterly basis to to the investor which takes care of the regular cash flow requirement. Previously the interest rates were fixed but now they are announced every year on 1st April. However, once invested the rates remain fixed for the term.
The scheme does not offer premature withdrawal but can be extended for three year period. From taxation perspective, the interest rate is taxable and Sec 80C is available for the invested amount.
The scheme holds good for investments but do watch for the taxability if you have other income sources.
2. PO MIS
Among Small Savings Schemes, Post Office MIS is most favored investment by retirees. The payout of interest on monthly basis is an option which is liked by this age group. This is a 6 year scheme where one can invest single or jointly with spouse.
A maximum of Rs 4.5 lakh while single and Rs 9 lakh in joint account can be deposited. Here also the interest rates have been made market linked and declared every year on 1st April. But once invested the rates remain fixed for the term. The interest earned is taxable at individual income tax slab.
The scheme is an attractive option for individuals with low or no tax liability, meeting their regular income need. However the returns will fall short for meeting the requirement of high tax payers.
3. Fixed Deposits
The traditional instruments is always a favorite. Considering the high interest rate scenario and the additional interest offered to senior citizens, it becomes an attractive option to earn fixed returns.
But like other options, one should evaluate the post-tax return to ensure the double impact of inflation and taxation is not wiping out your earnings. A good option for investments but understands the reinvestment risk in the long term.
3. Debt Mutual Funds
They have been in the news for last few years. First for the high returns and then for the downturn. It surely makes such investors jittery when the safety of their money is on high priority.
Moreover it’s difficult for each investor to understand the economics to know the reason behind the performance of debt market. But they are a good investment options provided you choose the right category which aligns with your objective.
Since debt mutual funds have high risk to low risk funds, it’s wiser to understand and take help of the right professional before making a decision. The advantage of debt mutual funds is the tax efficiency on gains which makes net returns higher when compared to other fixed income options.
4 Tax Free Bonds
These were started when interest rates were high and so are considered as a lucrative instrument since there is no tax liability on the earnings. A bond for 10-15 years where interest is paid on a defined frequency like annually, meets the requirement of retirees whose primary objective is to earn regular income.
The allocation has been done in this year budget and so one can expect some of them to be in the market. However, do watch for the interest rate offered and ensure you do not rely heavily on it for meeting your regular income needs.
Fixed income forms an integral part of your financial planning and retirees will always have a higher proportion in it. But inflation and taxation are two aspects which eat the earnings and can even make your returns substantially lower.
A return of 8 percent can turn out to be less than 6 percent if you are in the highest tax slab. Add inflation and you may not be on the right track to meet your goal. So analyze the options carefully and make a combination which can yield you desired objective.