7 MinsJuly 15, 2020
Retirement or the golden years are the second innings of your life. If you wish to live a comfortable retired life, planning and investing is a must. And the earlier you engage in it, the better it is to build a respectable retirement corpus.
When you are in the accumulation stage of your life, i.e. while you are earning, follow these simple guidelines to build a retirement corpus:
✓ Manage your cash flows by keeping track of income and expenses
✓ Engage in prudent budgeting exercise
✓ Aim to save more
✓ Utilize any windfall income sensibly
✓ Build a sufficient contingency reserve
✓ Insure optimally
✓ Put existing assets to use
✓ Deploy hard-earned money in productive investment avenues
Only when you do this, can you build a respectable retirement corpus before you hang up your boots.
When you retire or as you near retirement, you move into the asset distribution phase. In this phase the money accumulated will be required to meet retirement expenses. Hence, you need to shift the accumulated corpus from risky investment avenues
(viz. equity-oriented mutual funds) to relatively safer investment avenues that can earn you regular income post-retirement (to take care of the regular expenses). This is necessary to preserve the wealth created.
Here are five ways to earn you regular income post-retirement:
1. SWP from Mutual Funds – If you have been investing in mutual funds, chances are that you would have built a respectable retirement corpus. Opting for the Systematic Withdrawal Plan (SWP) is a good idea to create a cash
inflow stream post-retirement, from this corpus. Through an SWP, you can withdraw a fixed sum of money from a mutual fund scheme regularly (monthly, quarterly, half-yearly
or annually) and hold the potential to clock returns on the remaining investments over a period of time. It not only provides you with a fixed source of income but also inculcates a disciplined approach to spending it. Following are the benefits
of opting for SWP:
✓ Facilitates better planning of withdrawals, as per your need
✓ Enables rupee-cost averaging
✓ The remaining investments/units would benefit from the power of compounding
✓ Can be one of the effective ways to source your retirement needs
Remember, the withdrawals are subject to tax, depending on whether it is an equity-oriented or a debt-oriented mutual fund scheme. Further, the holding period will determine whether Short-Term Capital Gain or Long-Term Capital Gain Tax will apply.
2. Bank Fixed Deposits (Monthly or Quarterly Interest Pay-out Plan) – Among risk-averse investors and senior citizens, a bank fixed deposit has always been
the preferred choice. But to earn a regular income, choosing an appropriate plan is important. Only then will you be able to meet your liquidity and cash flow retirements.
To draw a regular source of income, opt for the monthly or quarterly interest pay-out plan, wherein the interest will be credited directly to your bank account. This will work better to manage your cash-flow needs during retirement. With the surplus
money that you don’t need immediately, go with the reinvestment of interest plan with suitable investment tenure.
Axis Bank currently offers a competitive interest rate on bank fixed deposits. To know how much you will receive as returns, use Axis Bank’s FD calculator. Do note that interest earned on bank
FD is subject to TDS if Form 15H is not provided.In case of an emergency, it is also possible to take a loan against bank FD.
3. Pradhan Mantri Vaya Vandana Yojana – This is a Government of India scheme (in the form of pension policy) available with the Life Insurance Corporation (LIC) and the minimum entry age for this scheme is 60 (while there
isn’t a maximum age of entry). Investments up to Rs 15 lakh can be done in a lump sum (called purchase price) in this scheme and over the 10-year tenure of the policy, you will receive a guaranteed annualised return in the form of pension
(paid monthly, quarterly, half-yearly, or yearly). The rate of interest is fixed by the government and reset every year.
At the end of the policy term of 10 years, the purchase price along with final pension instalment shall be payable. Under exceptional circumstances (say, money required forthe treatment of any critical/terminal illness of self or spouse), a premature
exit is also permitted. The surrender value in such cases shall be 98% of Purchase Price. And in the case of death of the policyholder during the term of the policy, the purchase price shall be refunded to the beneficiary.
A loan against the policy too is available after the completion of 3 policy years. The maximum loan that can be granted shall be 75% of the Purchase Price.
The government recently approved the extension of Pradhan Mantri Vaya Vandana Yojana till March 31, 2023. So, consider availing this policy and make the best of the opportunity.
4. Senior Citizen Savings Scheme (SCSS) – This again is a Government-backed small saving scheme suitable for retirees aged 60 years and above, and the investments can be done in single or joint name with the spouse for a
term of 5 years. An individual of the age between 55 years and 60 years who has retired on superannuation or under Voluntary Retirement Scheme (VRS) is eligible to open an SCSS account.
The SCSS account can be opened in an individual capacity or jointly with spouse. Nomination facility is available at the time of opening and also after opening of the account.
The maximum lump sum deposit permissible under SCSS is Rs 15 lakh, while the minimum is Rs 1,000. Investments in SCSS are eligible for deduction (upto Rs 1.50 lakh per annum) under Section 80C of the Income Tax Act, 1961.
During the maturity period of 5 years, the interest earned is compounded annually and credited quarterly to your savings bank account (payable on the first working day
of April, July, October and January). The interest is subject to TDS if the interest amount is more than Rs 50,000 per annum, while tax is payable as per your annual gross total income.
Also, if you wish to withdraw your money during the maturity period for some reason, you can do so, but keep in mind the following conditions:
- If closed before 1 year, no interest will be payable; and if paid already, it will be recovered
- After 1 year, if you prematurely withdraw, an amount equal to 1.5% of the deposit will be deducted
- After 2 years, if you prematurely withdraw, 1% of the deposit to be deducted
5. Rental Income from property – If you have invested in a second residential property during the wealth accumulation phase of life, consider letting it out on lease/rent. Likewise, if you have built a significant retirement
corpus, consider purchasing a commercial property which can fetch a respectable monthly income by the way of rent/leave & license fee. Rental income/license fee is an important source of earning for retirees and including such income while
managing your cash-flows may help you plan your finances better.
Retirement is an important life goal. If you take it up on priority, you will be able to build not just a respectable retirement corpus to meet expenses post-retirement,but also be able to pass on a rich legacy to your family. So, get started
[Also Read: Six Reasons to Focus on Your Retirement Planning Today]
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.