PERSONALFINANCE: Opt for low volatility after retirement
If you plan to withdraw money from your corpus regularly to meet expenses, have a portfolio of stable instruments, writes SANJAY KUMARSINGH
The Life Insurance Corporation (LIC) stopped selling its popular immediate annuity product Jeevan Akshay VI from December 1. Many investors rushed in at the last moment to invest in it, as its returns were among the most attractive of all the immediate annuities available. LIC is likely to relaunch the plan soon, but with a lower rate of return. Meanwhile, if you are looking for options to generate income after retirement, here are a few you should consider:
Senior Citizen Savings Scheme (SCSS): Most financial advisors recommend it to retirees due to its attractive interest rate of 8.4 per cent. You are also entitled to a tax deduction at the time of investment. And the interest rate remains unchanged for its five-year tenure.
But an individual can only invest up to ~15 lakh. If your spouse also invests (provided he/she is a senior citizen), the total can rise to ~30 lakh and can generate a return of ~2.52 lakh a year, or about ~21,000 a month. The interest paid gets added to your income and is taxed at your marginal tax rate. Tax deductible at source is deducted if the interest exceeds ~10,000 per annum.
Individuals aged 60 or more may invest in this scheme. Those aged 55 years or more may also invest provided they have retired and they invest their retirement benefits in it within a month of receiving them.
The scheme allows you to withdraw prematurely, but after levying a charge: 1.5 per cent of the deposit if you withdraw after one year, and 1 per cent after two years. The scheme can be extended for three years.
8 per cent Government of India (GoI) Savings Bond: It pays an annual interest rate of 8 per cent. There is no limit as to how much you can invest. You can buy it from nationalised banks, some private sector banks such as HDFC Bank and ICICI Bank, and offices of the Stock Holding Corporation. You can buy them any time. However, these bonds are not listed, so you can't exit by selling them in the secondary market.
Post Office Monthly Income Scheme (POMIS): It pays an interest rate of 7.5 per cent per annum. Unlike SCSS, no tax deduction benefit is available here. You can only invest up to ~4.5 lakh individually and ~9 lakh in a joint account. You can withdraw your money prematurely but have to pay a charge: Two per cent if you withdraw after one year but before three years, and one per cent after three years. Systematic withdrawal plans (SWP) of debt funds: You can also generate a regular income through an SWP in a debt fund. “The debt fund for an SWP should have minimal volatility. Opt for an ultrashort-term debt fund where the duration is low and credit quality is high,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA). SWP in higher duration funds, or those having high credit risk, should be avoided. Average return from ultra-shortterm debt funds has been 8.01 per cent over the past 10 years, but has fallen to 5.76 per cent over the past year. Investing three years prior to retirement will get you indexation benefits as soon as you start withdrawing.
Immediate annuities of life insurers: Annuities pay you a fixed amount for the rest of your life. In some plans, they can give a pension to your spouse, too, for the rest of his/her life. They guard you against reinvestment risk and their rate of return remains unchanged even if interest rates go down. However, they are susceptible to inflation risk. As time goes by, the purchasing power of the fixed amount paid to you diminishes. The rates of return of the products available currently are also lower ( see table) than that of many of the products mentioned earlier. Annuities also lock up your money for the rest of your life. “Only people who can't manage their money, that is, invest in other options to generate higher returns, should invest in annuities,” says Santosh Agarwal, head of life insurance, Policybazaar.com.
Post-retirement portfolio: A retiree needs to be mindful of a few risks when planning his post-retirement portfolio. One is longevity risk, that is, the risk that you may outlive your corpus. Annuities help you deal with this risk. The second is inflation risk. A small portion of your corpus, 20-30 per cent, should be invested in growth assets, like equity funds, to deal with it. The third risk arises from volatility.
An example will illustrate this point. Suppose you have a corpus of ~2 crore and an annual expense of ~10 lakh. Say, this corpus earns a return of 7 per cent a year, or ~14 lakh. You withdraw ~10 lakh and are left with a corpus of ~ 2.04 crore at the end of the year. But what if the corpus gives negative returns of 7 per cent for two consecutive years, and you keep withdrawing ~10 lakh each year? At the end of two years, you will be left with ~1.54 crore, a decline of 23 per cent. Now, it needs to grow by 30 per cent to touch the ~2-crore mark again. “When you withdraw from a corpus that has declined, you make your loss permanent. Most retirees can't tolerate high erosion of capital. So, the portfolio they are withdrawing from should be built of stable products,” says Raghaw.
Periodicity of payout by the instrument is also important. “Someone who gets a pension may not mind a payout every six months. But someone who doesn't, will need a monthly payout,” says Mumbai-based financial planner Arnav Pandya.