I recently retired and got Rs 22 lakh from my company. I want to utilise this entire amount to sustain my post-retirement years. In addition, I will be getting Rs 5,200 per month as pension from my earlier investments.
I thought of putting Rs 10 lakh in Post Office Senior Citizens Savings Schemes which yields 9 per cent per annum and Rs 5 lakh in a bank fixed deposit that will give me 8.75 per cent per annum. That would leave me with a balance of Rs 7 lakh which I considered putting in a liquid or short-term debt mutual fund. What I need is Rs 10,000 a month from my investments. Will I manage that? Can you make some suggestions? It’s obvious I cannot take too much of a risk.
– Ranjeet Kumar
Let’s look at the various investment avenues individually.
Senior Citizens Savings Scheme (SCSS)
Investments in the SCSS earn 9 per cent per annum which is payable quarterly. It has a maturity of five years after which it can be renewed for a further period of three years.
Only one deposit can be made in one account with an upper limit of Rs 15 lakh. Early withdrawals are liable to a charge of 1.50 per cent for the first year and 1 per cent for subsequent years.
This investment is exempt under Section 80C of the Income Tax Act.
Annuities From Insurers
Life insurance companies provide an annuity through pension plans either for a certain number of years, or for the entire life.
You further have the choice of opting for a return of principal at the end of the term, or on death, in which case, the amount will go to the nominee. Let’s look at a pension plan called Jeevan Akshaya - VI, from the Life Insurance Corporation of India (LIC).
At the age of 60, for Rs 1 lakh, it provides an annuity of Rs 9,530 per annum for life. On the death of the annuitant, nothing is payable.
If the option of return of principal at death is chosen, then the amount of annuity gets reduced to Rs 7,110 per annum, for life.
This figure is comparable to other fixed income investments where you earn a return till you are alive and also have the option of withdrawing the principal.
Annuity has another major disadvantage, no surrender or withdrawal is possible.
Income sche-mes and other debt schemes of mutual funds invest in money market instruments and corporate debt instruments. They are able to protect the downside risk, but are riskier as compared to bank fixed deposits, post office saving schemes and SCSS. Neither the principal nor the returns are assured in mutual funds.
Bank Fixed Deposits
Bank fixed deposits generally bear an interest rate of 5 to 9 per cent per annum, depending on the tenure and current interest rates prevailing in the economy. Interest payment can be availed at different periodicities. The advantage of a fixed deposit is that it is easily redeemable, though withdrawals before maturity will attract certain penalties.
For instance, let’s say you take a 5-year bank deposit which will give you 9 per cent per annum. At that time, the 3-year deposits are returning 8 per cent per annum. Now three years down the road, you need the money so you break the deposit. In that case, the bank will give you the interest rate for the tenure you held it. Since you held it for three years, you will get 8 per cent per annum. In some banks, they will deduct 1 per cent on that interest rate — which will amount to 7 per cent.
A wise move would be to opt for the flexi deposits that most banks offer. Here you keep the money in a fixed deposit but should the need arise, you can break it. So if you invest Rs 1 lakh in a deposit but after a while, you break the deposit and withdraw Rs 25,000, the balance Rs 75,000 will continue as a fixed deposit and earn the designated rate of interest.
Incidentally, bank fixed deposits of five year tenures or more are exempt under Section 80C of the Income Tax Act. But you cannot break such a deposit, it has to be compulsorily locked in for at least five years.
For safety purposes, do go ahead with your decision to invest in a SCSS. To provide yourself with some liquidity, consider a bank fixed deposit and a small amount in a savings bank account. But we suggest that you do not put Rs 5 lakh in the bank fixed deposit, Rs 3 lakh should suffice.
Why don’t you consider investing the remaining Rs 7 lakh in a balanced fund? A balanced fund invests minimum 65 per cent of its assets in equities (stock market), and the rest in fixed income securities (like a debt fund would). Due to its debt component, it will not give you the returns as a pure equity scheme would. But then neither will it be as risky.
You have specifically told us that you are risk averse and we understand that. But we are also considering inflation which will result in a need for your regular income to increase over time. The appreciation of your principal in the balanced fund can be used to supplement the increasing need for a fixed income stream by shifting it later to a more secure investment option.
Another benefit of investing in a balanced fund is that long term capital gains are tax-free. You can choose two such funds where the investment should be spread equally over a year through a Systematic Investment Plan (SIP). Some good picks are HDFC Prudence, DSPBlackRock Balanced or Canara Robeco Balanced.
Interest on fixed return investments 8.50% p.a.
Income: Rs 10,000 p.m. / Rs 1.2 lakh p.a.
Inflation: 5% p.a.
Expenses: Increase at same pace as inflation
Extra interest earned would have gone back into the fixed income investment. Whenever the interest income fell short of the need, the fixed income investment would be supplemented by withdrawing an amount from the balanced fund that would restore the required interest income.
Amount in HDFC Prudence: Rs 18 lakh
Fixed Income Portfolio: Rs 21.90 lakh providing you with the increased income of Rs 1.85 lakh p.a.
What you have to consider
Regular Income. Since your salary is no longer coming in, once you retire your focus has to be on a regular flow of money.
Liquidity. You may need money for sudden expenses.
Medical Insurance. You never mentioned it. If you don't have it, you would have to fund such expenses out of your savings.
Safety. You have rightly said that you cannot afford to take huge risks with your life savings. After all you must not outlive your investments.
Inflation. As prices rise, the cost of living increases. You need to consider an investment that will help you combat inflation.
Simplicity. Keep your portfolio simple and uncomplicated.