Wednesday, March 20, 2013

Have You Thought About or Planned for Income After Retirement?

"Retirement" is a word that is selling millions of ULIPs every year Across India. Insurance Advisors, Financial Planners, Bank Managers and even Bank Staff are trying to sell ULIPs to people when customers visit their offices for some reason or the other. The reason they give is simple "You need to Save/Plan for life after Retirement".

Unfortunately - Most of the ULIP's and Retirement Products that are being sold in the Market today solve only half the problem. They help you accumulate a lump sum corpus that will be available to you when you retire. It does not solve the other half of the problem - "Regular Monthly Income"

The Idea behind this article is to give you an idea about the investment options that can help you generate a regular income even after Retirement.

Before We Begin: There is a whole series of articles in this blog that deal with Retirement Planning. You can find them by clicking on the Page titled Retirement Planning at the top or by Clicking Here Also, people in their 30's may feel that they is still a long way to go before they actually retire. But, they forget the fact that their "Dads" and "Uncles" would be retiring very soon and they can use this knowledge to help those family members plan for their life post Retirement. To top it all off, if you help a senior member of your family plan their Retirement, you will get a good idea of how much money you will need post Retirement and how you can plan your life after Retirement in a better manner.

Pre-Requisite: The Pre-Requisite for this article is that "You have already planned for your Retirement and will have a lump sum corpus by the time you retire so that you can invest in the below mentioned instruments to start generating Regular Income"

Planning For Regular Income - Post Retirement

Accumulating money for Retirement and then leaving it as such is like, walking till your car and then walking away without getting in because, if you have been working for at least 2-3 years, you will definitely know that, whenever we get some lump sum cash and are happy about it, in most cases we are left wondering where the money went just 3 months down the line.

There are Many Ways by which you can generate "Regular Income" after you retire. But, all of them would require you to make a "Lump sum" Investment at first in order to get the income. That is why I mentioned this as the Pre-Requisite for this planning...

The following are some of the ways of generating "Regular Income" after "Retirement". At the End of each instrument you will find points titled: "Risk" and "Possibilities of Return" which will tell you how risky the investment is and the type of returns you can expect from each of these instruments. We will also mention if the income earned from these instruments is taxable or not.

1. Bank Fixed Deposits

This is probably the most famous as well as most commonly used instrument by Senior Citizens across the country. You invest a lump sum today and then the bank will make regular interest payments (Monthly/Quarterly/Half-yearly/Annual) for as long as the money is kept deposited with them. At maturity, the principal amount invested will be returned to us.

A Simple Example: Let us say I invest Rs. 25 lakhs in a Bank FD that is paying an interest of 8% per annum, the Interest I will earn at the end of 1 year is Rs. 2 lakhs. The bank will give me this money any way I want. For ex: Rs. 16,667/- per month or Rs. 50,000/- every quarter or Rs. 1 lakh every 6 months or Rs. 2 lakhs at the end of each year.

Risk: Very Low
Possibilities of Return: Above Average
Income Taxable: Yes

There are banks that offer more than 9% rate of interest for Senior Citizens. If you choose such banks the possibilities of returns are much higher than other banks. But, remember to stay away from finance companies that offer double digit rate of returns. They are very risky!!

2. Post of Monthly Income Scheme (POMIS)

One can invest a lump sum amount in POMIS and get monthly income for next 6 yrs. The return one can get is around 8% and the income can be given in form of monthly interest for next 6 yrs. One will get back his principal amount along with a 5% bonus at the end. One can invest only up to 4.5 lakhs for an individual account and 9 lakhs in a joint account.

Risk: Very Very Low
Possibilities of Return: Average
Income Taxable: Yes

3. Long Term Government Bonds

One can buy long term government bonds with maturity of around 25-30 yrs. that pay a half-yearly or annual interest at around 8%. As these are government bonds, the risk is almost absent but the interest earned by these bonds is fixed by the government and it varies from time to time. At the end of the tenure you get back your principal amount. These bonds are government’s way of raising money for public and you can consider these bonds as one of the safest instruments. Some of these bonds are also tradable in secondary market, so you can also sell them if you want to get rid of them.

Risk: Very Very Low
Possibilities of Return: Average
Income Taxable: Yes (Unless the Bond is Explicitly offered as a "Tax Free" Bond)

4. Annuity from Insurance companies

Annuity Plans are very similar to the first 2 products in the list. You can buy annuity plans from private or government Insurance companies. The returns or should I say monthly income would depend on the pension tenure and other options that you are allowed to choose. Products that have to return/refund the Principal at maturity usually offer lower rate of returns than annuity products that need not return the principal at maturity.

Risk: Low
Possibilities of Return: Below Average
Income Taxable: Yes

Annuity Plans offer much lower rate of returns (Around 6% only) when compared to other products. Once you invest your money, you are stuck until maturity and premature closure usually involves hefty penalties. So, think more than once before you invest in them.

5. Senior Citizen Saving Scheme (SCSS)

One of the best options for senior citizens above 60 yrs of age is to put their money in senior citizens saving scheme and get an interest of 9% per year which is payable quarterly. SCSS has a maturity period of 5 years after which if the individual wants, it can be extended for 3 more years. Even Investors in the age group 55-60 can invest in SCSS if they are retired (Through Voluntary Retirement) and the funds are coming from their Retirement Benefit.

Risk: Very Very Low
Possibilities of Return: Average
Income Taxable: Yes

Amount invested in SCSS is eligible for Sec 80C Benefits making this the best investment option possible for Senior Citizens

6. Rental Income

Buying an additional house when we are employed and then renting it out is a great way to supplement our income even before Retirement. For many of the senior citizens across India, this is a very commonly used option to generate income post Retirement. People even construct an extra floor and then rent it out. However, the problem with this route is the high initial investment and low liquidity. Selling a house is not easy and usually takes at least a few weeks and may take much longer depending on the size of the house, its locality etc. The problem here is identifying the right tenant. If any rogue element of the society manages to enter into your house, then, not only will they be skipping out on Rental payments but also they may make your lives difficult. So, make sure you think before you go this route and choose the right tenant for your house.

Risk: Average
Possibilities of Return: Average to Above Average (Depends on the Locality and Size of the house)
Income Taxable: Yes

7. Monthly Income plans of Mutual funds

There are mutual funds which are of category Monthly income plans (MIP). These mutual funds have inbuilt structure of providing regular income to its investors. However, they can be a little bit riskier because they invest in Equities too. On the bright side, the returns offered by MIP's are usually higher than other traditional investments. So, you must assess your risk taking ability before investing in such schemes. You can learn more about Monthly Income Plans by Clicking Here

Risk: High
Possibilities of Return: High
Income Taxable: Dividend Income is Tax Free but any other Income is fully taxable

As you can see, we have multiple options to invest for income after Retirement. I personally would split my investments across two or more instruments and will definitely include the Senior Citizen Saving Scheme.

Happy Retirement!!!

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