The biggest worry for retired people, or those who are nearing retirement, is how to earn a regular income once they stop working.
For starters, retirement begins with some good news. On retirement, a person receives various end-of-service payouts (such as Employees’ Provident Fund, Gratuity, National Pension Scheme, etc.) that supplement other investments. These payouts amount to a large sum of money. Since income from active work stops, it wouldn’t be wrong to say that the retirement corpus is a sacrosanct bucket of money. And you cannot afford to make mistakes with this corpus.
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Your retirement corpus needs to fulfil two goals. One: it should ensure a regular income. And two: the corpus should last for a good 20-30 years, since that is your life expectancy. Remember, for these 20-30 years, most do not get a regular salary or income. But your expenses will continue, even go up, especially medical expenses.
Since the goals are in two parts, the corpus itself should be handled in two parts or buckets.
First, let us look at debt instruments that are best suited for income generation for retirees, under Bucket #1 — regular income.
Bucket #1: Regular income
Before deciding where to invest, it’s imperative to estimate how much income one needs for regular day-to-day expenses.
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Once that is established, one needs to curate a proper mix of government-backed guaranteed returns as well as variable-return instruments to generate regular periodic income. Let’s look at a few:
Senior Citizen Saving Scheme
The Senior Citizen Saving Scheme (SCSS) is a guaranteed scheme backed by the government. It currently pays 7.4% interest, and the payout happens every quarter. Since you are a senior citizen, you can invest Rs 15 lakh, and generate about Rs 1.1 lakh per year. If your spouse is also a senior citizen, then another Rs 15 lakh can be invested under his/her Permanent Account Number (PAN) and a total annual income of about Rs 2.2 lakh can be generated through SCSS.
Pradhan Mantri Vaya Vandana Yojana
The Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a risk-free instrument is like SCSS and provides 7.4% interest. Here, you have monthly, quarterly, half yearly or yearly payout options to choose from. And, here, too, if the retiree invests Rs 15 lakh each for self and spouse, then another Rs 2.2 lakh can be managed in annual income.
Combining both SCSS and PMVVY and investing a total of Rs 15 lakh each for a retired couple (60 lakh in total) can generate about Rs 4.4 lakh annually or about Rs 36,000-37,000 in monthly income.
A very popular scheme that is similar to SCSS and PMVVY but offering lower returns (6.6%) is the Post Office Monthly Income Scheme (POMIS). This allows investment up to Rs 4.5 lakh only and hence, isn’t of much practical use as the annual income would be about Rs 29,000-30,000. But it can still be considered as an instrument to supplement SCSS and PMVVY. Here, too, you can invest a total of Rs 9 lakh as a couple to generate Rs 59-60,000 in additional annual income.
While you can invest a total of Rs 34.5 lakh per retiree across SCSS (Rs 15 lakh), PMVVY (Rs 15 lakh) and POMIS (Rs 4.5 lakh), what if you want to invest more? Let's look at some options you can consider:
RBI Floating Rate Bonds Currently, at 7.15%, this instrument, as its name suggests, witnesses 6-monthly rate resets (linked to the NSC rate + 0.35%). The interest payout happens half-yearly. Here, there is no upper limit on the investment amount and hence, those with a larger corpus can consider this a safe option for regular income generation.
One thing to note here is that the interest income from all these instruments — SCSS, PMVVY, POMIS and RBI Floating rate bonds — is taxed as per a retiree’s tax slabs.
For potentially better post-tax returns (because of indexation benefits), a part of the corpus can be deployed in suitable categories of debt funds as well.
Debt Funds
Depending on how much income is required and how much of it is managed via interest income coming from SCSS+PMVVY+RBI Floating Rate Bonds, the remaining income can be generated by setting up automatic SWP withdrawals from debt funds
There are more than 15 categories of debt funds. But when a retiree must choose debt funds for a retirement corpus, it’s best to stick to schemes only from the ultra-short-duration and low-duration categories for income generation.
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A part of the debt fund corpus can also be deployed in short-duration, Banking & PSU fund categories. But one needs to be careful when picking debt funds from these categories. There are good as well as badly managed funds in all categories. So, being selective is the key. And if you don’t know how to pick the right debt funds, talk to an investment advisor.
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Since annuities currently provide lower rates than SCSS, etc. it's best to delay annuity purchases as annuity rates increase with age.
All of the above was focused on income generation. Now let's look at the second bucket:
Bucket #2: Longevity
When it comes to the second bucket required to generate inflation-beating returns, at least for those who identify as moderately aggressive or balanced retirees, having a small percentage of the corpus deployed in growth-oriented equity funds is advisable.
You can consider large-cap index funds, aggressive hybrid funds, dynamic allocation funds and flexi-cap fund categories for this bucket.
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In addition, keep some money aside for unexpected contingencies. This can be kept in a bank FD to keep things simple.
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