Investment options for senior citizens

Published: October 1, 2015 at 9:35 am

Last Updated on September 4, 2018 at 10:57 am

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.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

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:

Generating an inflation-protected income with a lump sum

Illustration: Generating inflation-protected post-retirement income

Inflation-protected Income Simulator

Illustration: Passive Income Generation

Caution

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!.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)