Most retirees believe that a safe retirement portfolio should comprise 100 per cent of fixed income instruments. The reason being that fixed income vehicles can generate post-retirement income.
Unfortunately, the focus on fixed income often confuses certainty with safety. Though the interest income on such fixed income products is certain, but it’s not safe in terms of purchasing power.
Over the long term, even a modest inflation rate can substantially erode one’s future purchasing power. This, however, does not mean that one should ignore fixed income instruments. Ideally, one should have a combination of fixed income instruments with other growth assets that will provide financial stability, growth and most importantly, cash flow.
Here are a few investment options that the retired can consider for their retirement years.
BankSavingsAccount/ Short-TermBankFDs/ LiquidMFs
The liquid money that one keeps for the first 2-3 years of expenses will be the first casualty of inflation. Ideally, this money should be parked in safer assets. Bank savings account, short term fixed deposits, and liquid funds are a good alternative.
Liquid funds have no exposure to volatile assets, such as equities, and invest only in short-term debt instruments, such as treasury bills, commercial paper and the call money market.
These are called money market instruments, which is why liquid funds are also called money market mutual funds (MMMFs).
As money market instruments have a short tenure, returns from liquid funds are relatively stable. One can keep his/her short-term funds for higher liquidity in these schemes.
Senior Citizens Savings Scheme (SCSS) is meant for people above 60 years of age and offers them a dependable regular income. Retired people can be considered eligible if he/she is aged above 55 years. Retired military personnel can open an SCSS account after the age of 50 years. SCSS has historically been offering decent returns. The rate of interest in this scheme had not gone below 8 per cent in the last 10 years. However, in 2020, the year of the pandemic, the rate of interest in the scheme went down to its 10-year lowest to 7.4 per cent and remained so till September 30, 2022. The rate for the April-June 2023 quarter has been announced at 8.2 per cent.
From April 1, 2023 onwards, the investment limit in the scheme has also been increased to Rs. 30 lakh. So, retirees can now make the most of the scheme by investing in it to the maximum and be assured of a safe and higher regular income every quarter.
These could be opened with a bank or a post office—long-term bank FDs or Post Office Monthly Income Scheme (MIS).
In exchange for a lump sum investment, one’s account will be credited with interest if one opt for an interest payout option. However, it is best to decide the periodicity of payment depending on one’s requirements.
MIS is a government-backed savings scheme, which offers regular monthly income to the depositors in the form of interest income on their deposits.
In case one needs a regular monthly income, this is a better option than a bank fixed deposit, as the deposit rate is higher compared to a bank fixed deposit.
The minimum investment is Rs 1,000 and in multiples of Rs 1,000. The maximum investment is Rs 9 lakh for individual account and Rs 15 lakh for a joint account. The rate of interest is 7.10 per cent per annum. There, is however, a lock- in of five years.
These are offered by insurance companies. One has to invest a lump sum with an insurance company around one’s retirement age.
Annuities can be offered in various forms ranging from fixed annuity, say, for a term of 15-20 years, or for life. One would need to select the right option in tune with one’s requirements.
For instance, if the average mortality age in one’s family is 80 years, one should consider buying annuity for not less than 15 years.
However, one should check the rate of interest and compare it with other instruments before opting for these.
Long-Term Government Bonds
If you are looking for steady long-term income, you can invest in long-term bonds directly from the RBI Retail direct portal. But you will have to hold on to these till maturity. Though these bonds allow premature exit through the secondary market, they will be traded at a discount. Also if the interest rate goes up, the price of bond will go down.
So, one should invest in them only if can hold them till maturity. These bonds are volatile in interim, but they are safe, and so there is no credit risk.
The interest payout is made on a quarterly basis
The floating rate bond has a variable coupon payment, meaning that the rate of interest fluctuates based on the benchmark rate reset at regular intervals. However, the interest payment can create an income stream for you.
The benchmark rate of these bonds can be based on the repo rate, reverse repo rate, average Treasury bills or T-bills and savings scheme interest rates.
Investment in floating-rate bonds does not provide any assurance of future income stream since the rate of interest is adjusted at predetermined intervals. But these bonds are less volatile compared to long-term government bonds, as no credit risk is involved.
Though it is recommended that one should invest in safe instruments for retirement, a little bit of exposure to equities can give the required kicker to your retirement portfolio. Mutual Funds offer a wide range of products to fit your investment needs ranging from few days to long term products.
In a rising interest rate scenario like now, one instrument that combines the benefit of investing in debt investments and protects your corpus from interest rate volatility is a floating rate fund. They invest in floating rate instruments—debt securities with coupon rates that adjust to changes in benchmark interest rates. They work by adjusting the interest rate on this paper every six months.
One can also invest in hybrid schemes, such as debt-oriented hybrid funds from mutual funds. These are debt-oriented mutual funds with investment of 75-80 per cent in debt instruments and the rest in equity. By investing both in debt and equity instruments, it gives an investor both stability and an opportunity to earn more returns on equity investment.