Most people think of retirement as a distant reality, believing they can plan for it later in their careers. It can lead to a very confusing outcome. While in your 20s you feel too young to be preparing for retirement, by the time you enter your 40s you may be too late.
But eventually, it’s something that you would have to do for a comfortable life after work. A mixed bag serves best when it comes to building your retiree portfolio. In this post, we will discuss what you can do when doing financial planning for your retirement.
Bank fixed deposits (FDs)
Probably the first thing that comes to an Indian mind when we think saving for future – FD karva lete hain. A fixed deposit is considered a safe investment that can offer hassle-free liquidity when needed. However, in terms of returns, the FD is no longer as lucrative as it seemed when the market lacked viable alternatives. While some banks do offer returns around 6 to 7 percent or deposits with longer tenure, FD rates, in general, have been falling for some years now.
Investing in FDs after you turn 60 can garner an added 0.25-0.5 percent return, but that seems hardly worth the effort if you aren’t investing a significant sum of money. On the upside, the amount invested in tax-saving bank FDs qualifies for tax savings under 80C but restricts early withdrawals.
Post Office Monthly Income Scheme (POMIS) Account
A reliable, albeit limited investment option for retirement planning. The POMIS is a five-year investment with a cap of Rs. 4.5 lakh under single ownership. However, you can double it to Rs. 9 lakh with joint ownership. Also, multiple POMIS accounts can be opened to increase your investment. The interest as of June 2020 is 7.3 percent per annum, payable monthly.
Investments under POMIS are not eligible for any tax benefit, and the interest is also fully taxable. You can have the interest credited to a linked savings account or recurring deposit in the same post office. POMIS offers promise with its attractive interest rates and facility for converting joint accounts into single accounts and vice versa.
Senior Citizens’ Saving Scheme (SCSS)
Looking for a low-risk investment option after you retire? The SCSS is a must-have in your investment portfolio after you retire. The scheme is available for anyone over 60 and can be availed from your post office or bank. It’s one of the best investment options for early retirees as well. They can invest in the scheme, provided it is done within three months of receiving their retirement funds. The scheme has a five-year tenure which can be extended by three years upon maturity.
Once you invest, the rate of returns on SCSS remains fixed for the entire tenure. The rates are set each quarter and linked to the G-sec rates with a spread of 100 basis points. The upper investment limit is Rs. 15 lakh, but you can open more than one account to invest more. The interest pay-out is assured, and the capital and interested are secured by sovereign guarantee. SCSS investments are also eligible for tax benefits under 80C.
Mutual funds (MFs)
That’s how you get the ball rolling when it comes to retirement planning. Investing a portion of your income and later a part of your retirement funds in equity-backed products can garner better returns than any of the above options. Since retirement income is also subject to inflation, most portfolios need instruments with higher inflation-adjusted returns to beat the curve. Equity mutual funds can help safeguard your income when you are retiring early or when the non-earning period extends another two decades or more.
Depending on your risk tolerance, you can allocate a certain percentage of your income/savings for investment in equity mutual funds with further diversification across large-cap and balanced funds. However, retirees are advised to avoid investments in thematic and sectoral funds as the idea is to generate a stable income instead of focussing on high but volatile returns.
Furthermore, your retiree investment portfolio can also include debt mutual funds which offer easy liquidity. If you are in the highest tax bracket, it will make sense from a taxation perspective as well. While interest on bank deposits is fully taxable, income from debt funds is taxed as per applicable tax rate of the investor. Therefore, if your tax rate is 30% then short term capital gains tax on debt fund is 30% + 4% cess. Long term capital gains of debt fund are taxed at 20% with indexation.
Tax-free bonds
If you are starting your retirement planning from an early age, you can include them in your portfolio. However, do note that these are long-term investments that mature in 10, 15, or 20 years. As the name suggests, the interest is tax-free, so there is no Tax Deducted at Source (TDS) applicable.
Tax-free bonds are primarily issued by government-backed institutions such as Indian Railway Finance Corporation Ltd (IRFC), Power Finance Corporation Ltd (PFC), National Highways Authority of India (NHAI), Housing and Urban Development Corporation Ltd (HUDCO), Rural Electrification Corporation Ltd (REC), NTPC Ltd and Indian Renewable Energy Development Agency.
While most tax-free bonds carry the highest safety ratings, they are not available in the primary market at the moment. You can, however, trade in tax-free bonds with a Demat account on stock exchanges, as they are listed as securities.
Things to keep in mind when building your retirement portfolio:
- Moderate your expenses based on their time sensitivity from the very beginning of your career. E.g., if planning an early retirement, set aside money for things like your children’s education, rather than disrupting your investment strategy when the expenses come knocking.
- Increase the investment amount in tandem with appraisals or salary hikes.
- Remember that the rate of returns on EPF (Employee Provident Fund) is not enough to beat inflation, so your retirement planning should be in addition to your savings in EPF.
- Start planning your retirement ASAP if you haven’t already.
Starting retirement planning at 25
A head start is always the best. You can start with a SIP in equity mutual funds. At this stage of your career, the investment amount can be as negligible as Rs. 1000 per month, as it will compound substantially over the next 30 to 35 years of your life.
Starting retirement planning at 35
A little late to the party? Don’t worry; things can still be worked out. Achieving the goal of a comfortable retirement, however, becomes a little harder by this time. You will have to allocate more of your savings towards the retirement fund. Since you will have about 25 years to hang up your boots, the target should be beating inflation within that time frame. Balance your investments between fixed income schemes and equity mutual fund investments.
Starting retirement planning at 45
Better late than never. By this time, you are well past the ideal age for planning your retirement. You have about 15 years left to make the cut and still may need to work beyond 60 for a better post-work life. Start by allocating a more substantial portion of your income towards your retirement planning. However, do not get reckless, always maintain a balance between low, medium and high-risk investment options.
Don’t know where to start? Connect with us at helpdesk@mastertrust.co.in to begin a conversation on how you can plan a comfortable retirement.