When I was researching for the alternatives on the best investment after retirement, I could find at least half a dozen options. But I could feel that something was missing.
Though I could not point my finger on the missing link, but it was sure that I will not publish my blog post till I find it. The tricky part was, how to find it?
Then one day, after repeated brainstorming, “a word” solved the puzzle. The word was “portfolio“. How?
To understand this, we must first get into the shoes of a “retired person” who is looking for suggestions on how to wisely invest the retirement corpus.
It is important to remember that retired people do not think in the same way as others. They have different priorities (in terms of money management). What are their priorities?
- Income generation.
- Retirement corpus protection.
- Corpus growth (if possible).
What can take care of the above 3 priorities? A perfectly build “retirement portfolio”.
What is a retirement portfolio? A portfolio which has a mix of different investments. These investments has been so selected that it takes care of the above 3 needs.
What I mean by “mix of difference investments”?
Proportions in which retirement money is distributed among various investment options.
The missing link that I was talking about was this. A retired person should not only know where to invest retirement money, he/she should also know how to spread the money among different investment option.
Why to spread the money? For the sake of diversification. It is a must.
There is no hard and fast rule of diversification. An individual must do it based on his/her comfort and requirement. Confused?
Lets understand the thought process, it will surely clear some cloud…
The Thought Process…
Investment of retirement money must be done with extreme care. Every well-invested penny of the retirement corpus acts as a confidence booster for the family.
There are no easy answers to the question of “where to invest retirement money”? Why? Because every family is unique. They have their own set of priorities.
Hence the thought process that goes into the selection of best investments, varies. But few things remain common for all types of retired people.
These common points builds the foundation, which eventually can answer the important question, how to invest retirement money?
I will try to explain this idea based on the below infographics.
What is shown in this infographics? It says that, different people will act differently to handle their “retirement corpus”.
For some, the priority of income generation will get more weightage.
For some, the protection of corpus will be more important.
There are also financially independent people for whom the priority will be “how to make retirement corpus grow faster”.
The utility of the above infographic is, any type of individual can use it to figure out what should be included or excluded in their “retirement portfolio”.
Lets take few examples…
A retired person who has no other asset (not even a home). How this person will invest his retirement fund?
He will first buy a home. Then, whatever money is left in his retirement corpus, will be used only for income generation. Why?
Because the majority portion of retirement corpus is already used up in buying a home. Whatever is balance must be used for income generation only. Why?
Because a retired person must ensure his/her income generation. Balance all requirements should come later.
For the person in this example, I think the priority matrix will look like this:
What we can interpret from the above infographic? The risk taking capacity of the person is bare minimum.
Such a person can invest in only low yield, debt based investment options, which can generate stable and regular income.
A retired person who has no liability to take care after retirement. How this person will invest his retirement fund?
The first priority of this person will also be income generation, but he can also afford to think about corpus protection. Why?
Probably because he has some spare corpus left. Means what? Lets see his priority matrix…
What we can interpret from the above infographic?
- The person is using 75% funds to generate income.
- Balance 25% is used for corpus protection.
- The risk taking capacity of the person is only moderate.
Such a person can invest in two fronts:
- low yield, debt based investment options for generating regular income.
- high yield, balanced option (but no full equity) for corpus protection.
[Note-1: Example of a balanced options can be residential property, balanced funds, gold ETF etc]
[Note-2: What is corpus protection? Protection against inflation. A portion of retirement corpus is not burdened with the responsibility of income generation. They simply stays invested in options which can just beat inflation]
A retired person who has a rental property which takes care of his 50% monthly expenses.
How this person will invest his retirement fund?
This person is less dependent on his retirement corpus. Such a person can do a bit more with his retirement fund.
Lets see how his priority matrix will look like:
What we can interpret from the above infographic? The risk taking capacity of the person is decent.
Such a person can invest in three fronts:
- low yield, debt based investment options for generating regular income.
- high yield, balanced option (but no full equity) for corpus protection.
[Here by equity investing should be done via index funds or large cap mutual funds]
What we have discussed till now:
- It is necessary to build a “retirement portfolio”.
- Portfolio building must have a “thought process”.
Now we are ready to discuss the execution part of the investment process.
But before that, let’s read a “caution note”.
Retirement Fund – always handle with care
The first step should be to prepare “priority matrix”. Take your time. Give yourself at least a months time to understand your priorities.
While preparing the “priority matrix”, make sure that you are taking notes in a diary. Let your thoughts flow, but record it (take notes).
These notes will give you fair idea of what are your “strong” and “weak” areas. This will ultimately frame your priorities.
Once your priorities are known, take the next step. Try to find which investment options are best for retired people.
After retirement, people should not speculate with their money. If in doubt, look at your priority matrix. It will be your guiding star.
Generally speaking, for an average retired person in India, investment must be low on risk and must generate fixed income.
For majority, it will be better to stick to the proven ways of generating fixed income. Why?
Wealthy individuals who retire rich, for them fixed income is not a priority. They can afford to talk about investment diversification, capital appreciation, equity investment etc.
But this article is not for such wealthy individuals.
Majority of retired men in India has only handful of savings. They are not conversant with investment options and risks associated with investing.
For such people, it is better to handle retirement corpus with care.
I will suggest here few options which are absolutely safe and still can generate good returns.
They are all tailor made for investing ones retirement corpus.
So lets see how to begin the process of investing ones retirement corpus…
#A. Initial steps before investing the retirement money…
Step #A1: Collect the build-up corpus
This may look simple, but it is as important as any other preceding steps. Quantify and try to collect all savings that has been accumulated while in job. To mention few savings:
- Provident fund
- Fixed deposits
- Life Insurance
- Cash in savings account etc.
Here one may also recall those funds/loans that was given to the family/friends. This is the time that the retired person can ask that money back.
It is also a nice time to consider selling some assets, that one thinks, must be liquidated to add-up to the retirement corpus. Remember, every Rupee added to retirement corpus is very precious.
Lets look at the total saving of a typical retired person in India:
- Provident fund – Rs 30Lakhs,
- Gratuity – Rs 15 lakhs,
- Fixed Deposit – Rs 5 Lakhs,
- Share – Rs 3 Lakhs,
- Endowment plan – Rs 3 Lakhs, and
- Cash – Rs 2 Lakhs.
Adding up all these savings, it amounts to Rs 58 Lakhs.
This is the first step of retirement planning.
As soon as one retires, within the first few days itself they must start counting the numbers. Idea is to quantify how much is the retirement corpus.
Further investment of this corpus, as per ones priority matrix will then generate returns. The bigger is the retirement corpus the better.
Step #A2: Estimate the expense requirement
Count all expense requirements (daily/monthly/annual ).
Retired people have lower expense requirements, apart from their medical needs. To talk about expenses, lets list down few:
Idea of doing this exercise is to know exactly how much one need to dig into the retirement corpus each month to manage expenses.
One can never cut the expenses down to zero. No matter how judiciously we save, there will be some bare minimum expenses.
But no matter how low is the expense requirement, withdrawing money regularly from retirement corpus will ultimately exhaust it. This is where careful investment of retirement money is important.
Investment will make the retirement corpus grow just fast enough so that regular withdrawals are possible without depleting the corpus (as far as possible).
Target is to generate fixed income without digging into principal amount (retirement corpus).
In our example, adding all expenses, it amounts to Rs 31,500/month.
- Electricity Bill (Rs 2000/month)
- Water Bill (Rs 500/month)
- Society Maintenance Bill (Rs 2000/month)
- Internet Bill (Rs 1000/month)
- Payment to Maid (Rs 2500/month)
- Cooking Gas (Rs 500/month)
- Phone Bill (Rs 1000/month)
- Car Wash (Rs 500/month)
- Car Maintenance (Rs 1500/month)
- Car Fuel (Rs 1000/month)
- Car Insurance (Rs 1000/month)
- Property Tax (Rs 500/month)
- Medical Insurance Premium or savings (Rs 3000/month)
- Grocery (Rs 3200/month)
- Vegetables (Rs 2800/month)
- Milk (Rs 1000/month)
- Miscellaneous Expenses (Rs 3000/month)
- Investment to hedge inflation (Rs 2500/month)
- Income Tax (Rs 2000/month)
[Note: These expense has been considered just as an example. I will request you to tune the values and expense heads as per their needs]
Step #A3: Quantify what return is necessary
In our example, retirement savings is Rs 58 Lakhs and monthly expense is Rs 31,500.
In order to generate Rs 31,500 per month from savings of Rs 58 lakhs, return @ 6.5% per annum is required.
[6.5% = (31,500 * 12) / 58,00,000]
In India, a return of 6.5% per annum is not a very difficult return to generate.
But why we are being satisfied with so low returns? Because the priority of retired person is only fixed income generation.
When yield-requirement is in range of 6% per annum, the person need not take lots of risk while investing his retirement money.
The only care one has to follow is to select the right investment options which is tailor made for retired people.
Now we are ready to see how to invest the retirement money. Lets do it…
#B. Where to invest retirement money?
The person shall to divided the retirement corpus into eight parts as shown below:
- Current A/c
- Savings A/c
- Fixed Deposit
- Post Office – Monthly Income Scheme (PO-MIS)
- Post Office – Senior Citizen Savings Scheme (PO-SCSS)
- Pradhan Mantri Vaya Vandana Yojana (PMVVY)
- MIP offered by Mutual Funds – monthly dividend plan (MF-MIP)
- Balanced Mutual Fund – for capital appreciation
Lets discuss all options in details…
[P.Note: For senior citizens, no income tax is applicable if annual income is less than Rs.3.0 lakhs. But TDS will still be deducted. In this case, while filing the income tax returns at the end of the month, income tax refund should be claimed. It is also important to keep all TDS certificate handy while filing the income tax returns.]
#B1. Savings A/c:
Ideally I would like to park all my retirement money in savings account.
But the problem is, it is going to pay me returns as low as 3.5% per annum.
Which means, I need a big corpus to generate a monthly income of Rs 31,500?
Yes, the corpus required will be Rs 94,50,000.
But the problem is, not many has such a huge retirement corpus.
In this case we shall shift to the next best alternative.
If one has a retirement fund of Rs 58,00,000; interest @3.5% will generate monthly income close to Rs 16,900.
Considering our example, income generated from savings account is not sufficient (we need Rs. 31,500 per month).
So, what is best here is to keep only 12 months worth expense in savings account.
Let’s use savings account only as a locker which helps to manage ones day to day expenses for next 12 months.
For making the retirement corpus grow, let’s use other investment options.
[In our example – see the above infographic, fund allocation to savings account is limited to 1.7% only]
#B2. Fixed Deposit:
After savings account, it is bank’s fixed deposit that is the most preferred option. Why?
It allows one to earn monthly income without having to take too much risk.
The accrued interest gets credited to the savings account on a fixed date each month.
If given a chance, I would personally lock all my retirement money in fixed deposit only.
But the problem with fixed deposit is that, all its interest earned is taxable.
Hence, net of tax yield of FD is also low (net of TDS is 6.08% – example).
If one has a retirement fund of Rs 58,00,000; interest @6.08% will generate monthly income close to Rs 29,400.
Considering our example, fixed deposit is good but not good enough to support the expense requirement of the retired person.
I will keep at least ~16% of my retirement corpus invested in FD.
The balance I will invest in other retirement friendly options.
Lets consider more profitable or/and tax efficient investment options.
[In our example – see the above infographic, fund allocation to fixed deposit is limited to 17.2% only]
#B3. Post Office – Monthly Income Scheme (MIS)
Monthly income scheme (MIS) is a very safe investment for retired people. These are tailor made to generate monthly income for retired people.
The interest rate can be as high as 7.6% per annum.
But there are some major limitations of MIS of post office.
- Number one limitation is that interest gets credited to linked post office savings account (POSA) only. Though POSA has cheque facility but it nether has ATM nor online banking services. It means one has to go physically to post office to collect money.
- Another limitation of PO-MIS is that maximum amount that can be invested is Rs 9 lakhs in case of joint account (with spouse). For single account maximum investment allowed is Rs 4.5 lakhs.
By investing Rs 9,00,000 @7.6% will generate monthly income close to Rs 5,700.
Irrespective of all limitations of MIS, PO-MIS must be considered by retired people as one of their preferred investment option for retirement money.
Learn more about Post Office Monthly Income Scheme (MIS) here…
[In our example – see the above infographic, fund allocation to PO-MIS is limited to 15.5% only]
#B4. Post office Senior Citizen Savings Scheme (SCSS)
Senior citizen savings scheme is another investment option for retired people in India. Like MIS, in SCSS as well, there are few limitations.
One of the limitation is related to maximum amount one can keep in SCSS A/c. Maximum amount that one can invest in SCSS is Rs 15 lakhs (joint account with spouse).
[Note: One can open multiple SCSS accounts. But sum of deposit in all SCSS accounts must not cross Rs.15 Lakhs]
Almost all public sector banks offer SCSS accounts.
Apart from SBI, other known banks which offer SCSS are Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Indian Bank, Vijaya Bank etc. Only ICICI Bank offers SCSS account among private sector banks.
The lock-in period for the invested fund is 5 years. But this is ok, as invested retirement corpus shall not be touched too often.
SCSS has one very big advantage. The interest paid by IPO is @ 8.4% per annum. This is higher than any other monthly income plans in India.
But TDS is applicable on interest accrued in SCSS. Net of TDS return of SCSS is 7.56% (PO-SCSS).
The interested paid in on quarterly basis. The interested is credited to savings account opened in the same post office.
Money invested under SCSS also qualifies for deduction under S/c 80C.
Learn more about Senior Citizen Savings Schemes here…
[In our example – see the above infographic, fund allocation to PO-SCSS & SBI-SCSS is limited to 51.8% only]
[Read about Pradhan Mantri Vaya Vandana Yojana here]
#B5. Monthly Income Plan of Mutual Funds (MF-MIP):
Please note that, we are talking about mutual fund MIP having annual dividend payment option.
Though monthly dividend payment option is also available, but I prefer annual option. The yield is better.
[P.Note: To generate regular income from MF-MIP, retired people must subscribe to dividend option and not growth option.]
Returns offered by mutual fund MIP’s are best compared to all other monthly income plans. But net of dividend distribution tax (DDT-28.84%) makes its yield low.
On an average, a good mutual fund MIP can yield annual dividend @8.2% per annum. Net of DDT lowers the yield of MF-MIP to 5.84% per annum.
In our example, we need investment returns of 6.5% per annum, so MF-MIP is not good enough. Still, I am considering MF-MIP, why?
There are two reasons:
- At times a good MF-MIP can yield even higher returns (more than 8.2% p.a.). On internet we can see MF-MIP yielding 9% per annum. It means, MF-MIP has potential to generate higher returns (net of DDT).
- MF-MIP has another advantage. Investing in them allows one to get a small exposure to equity as well. This is good from point to view of investment diversification.
Learn more about MIP’s offered by Mutual Funds here…
[In our example – see the above infographic, fund allocation to MF-MIP is limited to 6.4% only]
#B6. Equity based BALANCED mutual fund:
Why I am suggesting a balanced fund for retired people? It has a equity based portfolio, right? It means it is too risky for retired people, then why invest here?
No matter how much we resist, there will always be a temptation to invest our money for earning fast capital appreciation.
Though for a retired person, capital appreciation is not a priority, but it is better to keep a provision for this as well. This is done more to satisfy the urge for earning higher returns.
In case, our example person has some extra funds (above Rs.58 lakhs), he can invest this fund in balanced mutual fund.
Learn more about balanced funds here…
[In our example – see the above infographic, fund allocation to MF-Balanced is limited to 0.9% only]
Essential is to finalize how to distribute ones retirement corpus so as to generate net investment return of 6.5% per annum.
The same can be established by distributing funds as shown in above info graphics.
The wiser will be the fund distribution (low risk, just-enough returns), more peace will be bestowed on the retired person.
It is important to lock our savings. Locking savings means investing it and not keeping it free in savings account. If this is not done, the money gets spent needlessly.
But for retired people, investment cannot be done anywhere. It is essential to invest only in those options which are tailor made for retired people.
What I suggest here is that, one must prepare an excel sheet for self, similar to what is shown in the above graphic.
Idea of this excel sheet should be to play with the numbers. Distribute your retirement funds in such a way that your monthly income requirement is met.
The proportion of fund distribution shown in above graphics is just for an example. Depending upon ones “retirement corpus” and “expense requirements“, one must do the fund distribution to generate enough income.
For sure the returns will be less, but at least the corpus will be safe.
There is nothing more important in old age than good health and peace of mind.
Have a happy investing.