iStockMost retired folks dread low interest rates. This is mainly because most retired people look for guaranteed, tax-free returns. Much to their dismay, they find out there are not many guaranteed, tax-free instruments available in the country for retired folks.
No wonder, many of them are eager to get into mutual funds to earn superior returns. The episodes with Franklin Templeton debt schemes and defaults and downgrades in the debt mutual fund space have unnerved many of these investors. Franklin Templeton Mutual Fund's decision to shut down six of its debt mutual funds further eroded their trust in mutual funds.
Here are a few pointers for retirees seeking a regular income.
One, are you looking for a primary income? It is important to know the difference between primary income and supplementary income. Primary income is the money you need for your basic living expenses. Secondary or supplementary income refers to the extra money you want to add to your primary income. Please note that you cannot do without primary income. When it comes to secondary income, you can exercise discretion.
So, if you are looking for primary income, you should always look for instruments, preferably government-backed, that offer guaranteed returns. If you are lucky and the government is offering tax-free bonds, subscribe to it. That is the best thing that can happen to a retiree.
Here are your other regular options:
Bank deposit
Senior Citizens' Saving Scheme (SCSS)
Post Office Monthly Income Scheme (POMIS) Account
Annuities
Why these schemes? As said earlier, they offer you guaranteed returns during the tenure of your deposit. Two, they have the backing of the government. Sure, bank accounts are not fully backed by the government, but governments can't allow banks to collapse. It is a huge system risk, so governments mostly step in during bank crises.
Banks offer you guaranteed interest for the tenure of your deposit. However, bank FD rates are also a cause of concern for many these days. Similarly, both SCSS as POMIS offers guaranteed payment during the tenure of the deposit. Both these schemes come with maximum limits of investments. For SCSS, the maximum limit is Rs 15 lakh. You can invest a maximum of Rs 9 lakh in POMIS. Both the schemes have a tenure of five years. You can extend SCSS for three years once the scheme matures. The returns from all these sources are taxed.
Don't let the taxation part dampen your spirit. These are your safest options to secure a primary income.
You can also buy an annuity from life insurance companies to take care of your primary income. However, the annuity rates are very low in our country. So, this will work for you only if you have a very large corpus. You can use a part of it to secure an annuity for a longer period or for life. Again, annuity is taxed.
Now, when it comes to secondary income, you can be a little adventurous. Note, adventure doesn't mean taking huge risks. We are referring to taking extremely calculated risks. You can use short-term debt schemes to set up Systematic Withdrawal Plans (SWPs) to get extra income. SWPs, as the name says, allow you to withdraw money from your scheme. So, you have to first find out how much you want to withdraw. if you are thinking of not touching the capital, make sure you withdraw less than the expected returns from the scheme. For example, if you are likely to get six per cent annual returns, withdraw only 5% from the scheme. If you withdraw more than your returns, you would start consuming your capital. Be mindful of this aspect.
Many retirees still invest in equity-oriented schemes like aggressive hybrid schemes and opt for dividends to supplement their income. This is not a great idea. Equity is risky and volatile. You should invest in these schemes only if you can afford to risk losing the capital. Also, do not expect steady returns from them. When the market goes through a rough phase, these schemes would not declare any dividends. Many retirees are currently feeling trapped in these schemes. So, do not fall for sales pitches and sign up for such adventures.
This doesn't mean that you cannot invest in equity mutual fund schemes. If you are ready to take the risk, you may invest a small part of your total corpus in equity mutual funds for capital appreciation. The trouble with most guaranteed returns and government-backed options is that they offer modest returns that don't keep pace with inflation. That means, over a period you would lose your purchasing power. Equity investments could help you to counter the effect of such a situation.
No wonder, many of them are eager to get into mutual funds to earn superior returns. The episodes with Franklin Templeton debt schemes and defaults and downgrades in the debt mutual fund space have unnerved many of these investors. Franklin Templeton Mutual Fund's decision to shut down six of its debt mutual funds further eroded their trust in mutual funds.
Here are a few pointers for retirees seeking a regular income.
One, are you looking for a primary income? It is important to know the difference between primary income and supplementary income. Primary income is the money you need for your basic living expenses. Secondary or supplementary income refers to the extra money you want to add to your primary income. Please note that you cannot do without primary income. When it comes to secondary income, you can exercise discretion.
So, if you are looking for primary income, you should always look for instruments, preferably government-backed, that offer guaranteed returns. If you are lucky and the government is offering tax-free bonds, subscribe to it. That is the best thing that can happen to a retiree.
Here are your other regular options:
Bank deposit
Senior Citizens' Saving Scheme (SCSS)
Post Office Monthly Income Scheme (POMIS) Account
Annuities
Why these schemes? As said earlier, they offer you guaranteed returns during the tenure of your deposit. Two, they have the backing of the government. Sure, bank accounts are not fully backed by the government, but governments can't allow banks to collapse. It is a huge system risk, so governments mostly step in during bank crises.
Banks offer you guaranteed interest for the tenure of your deposit. However, bank FD rates are also a cause of concern for many these days. Similarly, both SCSS as POMIS offers guaranteed payment during the tenure of the deposit. Both these schemes come with maximum limits of investments. For SCSS, the maximum limit is Rs 15 lakh. You can invest a maximum of Rs 9 lakh in POMIS. Both the schemes have a tenure of five years. You can extend SCSS for three years once the scheme matures. The returns from all these sources are taxed.
Don't let the taxation part dampen your spirit. These are your safest options to secure a primary income.
You can also buy an annuity from life insurance companies to take care of your primary income. However, the annuity rates are very low in our country. So, this will work for you only if you have a very large corpus. You can use a part of it to secure an annuity for a longer period or for life. Again, annuity is taxed.
Now, when it comes to secondary income, you can be a little adventurous. Note, adventure doesn't mean taking huge risks. We are referring to taking extremely calculated risks. You can use short-term debt schemes to set up Systematic Withdrawal Plans (SWPs) to get extra income. SWPs, as the name says, allow you to withdraw money from your scheme. So, you have to first find out how much you want to withdraw. if you are thinking of not touching the capital, make sure you withdraw less than the expected returns from the scheme. For example, if you are likely to get six per cent annual returns, withdraw only 5% from the scheme. If you withdraw more than your returns, you would start consuming your capital. Be mindful of this aspect.
Many retirees still invest in equity-oriented schemes like aggressive hybrid schemes and opt for dividends to supplement their income. This is not a great idea. Equity is risky and volatile. You should invest in these schemes only if you can afford to risk losing the capital. Also, do not expect steady returns from them. When the market goes through a rough phase, these schemes would not declare any dividends. Many retirees are currently feeling trapped in these schemes. So, do not fall for sales pitches and sign up for such adventures.
This doesn't mean that you cannot invest in equity mutual fund schemes. If you are ready to take the risk, you may invest a small part of your total corpus in equity mutual funds for capital appreciation. The trouble with most guaranteed returns and government-backed options is that they offer modest returns that don't keep pace with inflation. That means, over a period you would lose your purchasing power. Equity investments could help you to counter the effect of such a situation.
( Originally published on May 21, 2020 )
Get Unlimited Access to The Economic Times
