A look at investment options for Indian Senior citizens, taking into consideration, tax, liquidity, capital preservation and ability to generate an increasing pension. This is a dangerous topic to broach!
Before retirement, volatility is a friend and inflation a mandatory benchmark for a portfolio return to surpass. After retirement, volatility can either be a friend or a foe. This makes beating inflation an option to be exercised only if the corpus is big enough.
My point, the oft-asked question, “where should I invest?" should be answered after a holistic examination of fiscal health. Yet, it is extremely disappointing to sense the impatience in senior citizens who ask me this question, when I in turn question them about the corpus that they have and their requirements from it.
Many (well most) senior citizens are not interested in such an all-round examination. Their question was ‘where’ and they want only want products or avenues as answers. Filled with irritation, disappointment, and a sense of gratitude that I am not in financial advisory, I try my best to exit the conversation as quickly as I can.
This is a bit like going to the doctor and stating, “I have a cough, do not ask me any further questions and just prescribe"! This post is only meant for those willing to take a 360-degree view of their financial requirements and is not a simple list of investment options.
Step 1: Should my corpus generate income or should it grow?
That is, is my pension or mandatory annuity enough to take care of my expenses for at least the first few years in retirement? If not, how much extra income is required?
For example, if average monthly expenses = 25,000 and 17,000 is the monthly pension, about 8,000 is the income to be generated from the corpus in hand. Which takes use to the next step.
Step 2: Do I have the ability to generate an increasing pension?
If about 13.8 Lakhs were to be invested in a fixed deposit at 7% pa, the monthly payout would be close to 8,000.
If 13.8 L constitutes only 30-40% if the total corpus, the retire can afford to increase the monthly payout. This is referred to as indexation. A simple indexation that might work is 3%. That is the monthly payout from the corpus should increase at at least 3%. An indexation of 6% would be nice, 8% would be pretty great. Government employees, thank to DA, twice a year enjoy double-digit indexation. This is a a thing of the past, thanks to NPS.
A detailed and calculator for answering step 2 can be found in this post: When should senior citizens purchase an annuity?
If 13.8 L constitutes a significant chunk of the portfolio (say 50% and above), the retire cannot afford to increase the monthly payout and has to contend with a constant payout by purchasing an annuity.
If I have enough corpus to allocate part (A) of it for my immediate income needs and let the rest (B) grow in a volatility-free portfolio or a diversified portfolio, the investment plan must be laid out: or rather the expected reasonable, and safe, post-tax return for parts A and part B.
Step 3: What is my tax slab?
A 0%, need to generate income with the full corpus: Senior Citizen Savings Schemes (SCSS), and safe fixed deposits. There is the risk (as in present times) that when the instrument matures, the rate would be much lower than earlier. That is a chance that one will have to take. Annuity products are okay, but the rate may be too low if purchased in the 60s.
Short-term and ultra-short term funds will work since no tax need to be paid. However, these are not free from risks. So I think, best avoided.
B 0%, part of the corpus can be allowed to grow untouched: This is probably unlikely!
C 10%, need to generate income with the full corpus:
Options are same as A, above. Debt funds do not make sense here. Any capital gains over and above the basic exemption with be taxed at 20% with indexation. This is likely to be more than the tax slab, except during periods of high inflation.
D 10%, part of corpus can be allowed to grow untouched:
In this case, it is best not to buy annuities. One can consider creating a fixed deposit income ladder
Scheme like Senior Citizens Savings scheme (opened at Bank not PO, never PO!) can be used for two purposes: generate income and reinvest (a part of) it in say a flexi-deposit account.
A small portion, say about 10-20%* can be invested in a say a balanced fund, provided it is allowed to grow for at least 7+ years.
E 20%, need to generate income with the full corpus:
Options are same as A, above. Debt funds (in part) can be used to generate income as there is a possibility that with indexation, the capital gain will reduce and effective tax rate will be lower than 20%. However one needs to be cautious and stick to liquid and ultra short-term funds here.
F 20%, part of corpus can be allowed to grow untouched:
A mixture of fixed deposits, SCSS and debt funds for income generation.
Debt funds + equity funds (suggest 20-30%)* for the portion that can grow untouched.
G 30%, need to generate income with the full corpus:
This is either unlikely or a sign of trouble! Options same as A along with debt funds.
H 30%, part of corpus can be allowed to grow untouched:
If (and only if) comfortable, income can be generated with debt funds alone.
Debt funds + equity funds (suggest 30-50%)* for the portion that can grow untouched.
(*) The equity allocations mentioned above are a percentage of corpus B alone and not the entire corpus.
If a part of your corpus can grow untouched, I have a series of posts and calculators for your consideration:
I have seen the recommendations made by financial advisors and financial planners to retirees and it make me disappointed and scared in equal measure. There are too many advisors out there who project unrealistic equity returns and unsafe allocations for retirees.
It is your money. If you lose it, you do not have the chance to earn it back again. Do not trust the recommendation of any financial advisor blindly. Double-check and triple-check. Remember that most of them are product-sellers.
It is up to you to take a holistic decision about your money. Seeking piece-meal advice can destroy your mental peace.
I am no expert. In fact, I am a nobody. My only qualification to write this article is that I always believe that to err on the side of caution is the key element in retirement planning. So do not follow anything in this post unless you follow it up with a thorough investigation.
1) Higher return cannot be achieved without taking on higher volatility
2) There is no free lunch. You cannot eat your cake and have it too.
3) Do not invest in a new product after retirement, unless you have understood all the risks. Please recognise that product sellers will not sell risk!.