Where should senior citizens invest in 2020?

Published: May 26, 2020 at 11:34 am

Last Updated on February 12, 2022 at 6:16 pm

Falling interest rates and “risky” mutual funds have spooked senior citizens and their self-appointed advisors – their children. As always, wrong questions like “should I invest in “7.75% RBI bonds?”, “Should I buy PM Vaya Vandana Yojana?” are doing the rounds. A look at how senior citizens should invest in 2020.

How a senior citizen should invest at any point in time depends on several factors (apart from their age and the spouse’s age) like (1) how much money do they have? (2) What kind of regular income do they get? (3) Are they dependent on their children? (4) What kind of health care needs do they have now and foresee in future (based on the present situation)? (4) What is their experience with capital market investments?

I used to be under the misconception that senior citizens, given their age and experience, would in “in general” choose wisely. That is until I read stories about them buying ULIPs (post 60) based on the advice of bank RMs; buying monthly dividend option of hybrid equity funds; chasing returns in risky debt funds; co-op and small finance bank FDs; thrift schemes and so on.

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Eager children itching to put their newly gained “financial literacy” at work want their parents to invest in mutual funds because they are “Sahi hai” or some such thing. Now after finding out how risky they can, how risky banks can be, everyone wants the umbrella of safety. Nice!

“where should I invest?” is a question that should never start with product names. Retirement planning is the most difficult problem in personal finance. Give a corpus and income stream less than what a retirement calculator coughs up, questions like

“should I get constant income from it with bonds or annuities?” or

“draw an income from it after investing in various buckets?”

is something even “experts” would find hard to answer. The freefincal robo advisory template offers a solution to this in an automated manner.

For the purpose of this article, we shall assume the senior citizen does not have much of a corpus to play and is looking for “safe options” (non-market linked). The safest option would be to hire a SEBI registered fee-only financial advisor. If you are a son/daughter reading this for your parents, please make them work with a financial advisor asap. Stop experimenting with your parent’s retirement corpus!

To be honest, the “safe” options are both obvious and limited.  What you choose depends on the need.

The senior citizen(s) need regular financial support from children in addition to their own pension. The children are financially stable. In this case, whatever little money they have can be invested in a cumulative debt instrument like the RBI 7.75% bonds.  What does this mean? The children do not need the lump sum of the parents and this money can be locked away for a few years.

The senior citizen(s) need regular financial support from children in addition to their own pension. The children are not financially stable. The lump sum amount can be invested in fixed deposits of say SBI or post office or even senior savings scheme (which is not cumulative). In case of emergencies, this amount may need to be liquidated.

The senior citizen(s) require regular income. Perhaps they are just about to start retired life or are looking for an additional monthly income component. the Pradhan Mantri Vaya Vandana Yojana (Modified- 2020) Scheme launching today (May 26), the senior citizen’s savings scheme (quarterly payout) or post office monthly income scheme will work well to supplement the main pension from an annuity.

A life insurance annuity interest rate is for the life of the annuitant or their spouse. See: How Annuity Plans Work. The above three regular payout schemes will suffer from interest rate changes in future.

Another lesser-known option is to buy long term 20, 25, 30Y gilt bonds with six-month interest payout. They can work as a life-long annuity without the need for life certificates

While tax-free bonds are certainly an option. There are two considerations to keep in mind. Tax-free bonds will mature within the next 15 years, meaning the income will stop after that and alternative arrangements will have to be made.  Second is the yield.

Tax-free bonds are available only at a premium. This means much higher than the face value of Rs. 1000 – about Rs. 1200-1400. This means when you buy, you lose a significant amount of future gains from coupon payouts.

So before you buy a tax-free bond, find its yield = coupon rate divided by the current price. This yield should be higher than the post-tax yield of a taxable bond or deposit. If the difference is not much, there is nothing special about a “tax-free” bond. Also see: How to buy tax-free bonds in the secondary market

Thus the primary clarity required is, (1) do I need income or growth (2) if I need income, do I buy a “for life” income product or is a limited-term product acceptable? (3) If I need growth, does liquidity matter or can it be locked away? Once the answers are clear, the products become obvious. Without this clarity, little point in worrying about which offers higher returns.

There is still a place for debt funds, arbitrage funds etc but those are for senior citizens who have a large enough corpus to draw an income from it – instead of living off the interest income only. Those who are recently retired can make this quick check: When should senior citizens purchase an annuity?

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