Where to Invest my Retirement Money?
Retirement is one of the most important financial goals that everyone should have. Some of the typical financial goals of individuals include marriage, long vacation abroad, higher education, buying a home, etc. However, one common goal is to attain financial freedom or have a comfortable retirement after a certain age, when working may not be possible due to physical, mental and other limitations.
Social Security in India
Most people who are salaried and have moderate assets will need to have a good framework or plan to save and invest for their retirement. This is critical for people in the Indian middle class bracket although retirement planning is essential for all irrespective of age, income or financial status.
We can classify people in to two broad categories: –
1. People with social security (this is focus of the article)
2. People without social security
People with social security
This group consists of people who work in the governmental organizations or public sector units or quasi governmental organization which provide a pension after retirement. Pension option is available for people who retire voluntarily as well as for those who work till a certain age or certain number of years to be eligible for pension benefits.
Generally people working for Central Government, State Government, public sector organizations/companies, public sector banks, etc would have pension benefits.
Scope of the Discussion: Who has retirement money?
The scope of our discussion here is about people who have pension benefits or have already built a sizable retirement corpus after retirement. Examples of two such cases are shown below as illustration:-
Mr.Sanjay aged 60, retired from post office service recently after serving for over 25 years. Now he is eligible for pension, which works out to Rs.25000 per month. Since he lives with his son’s family in his own flat – his daily upkeep is taken care and he has to just take care of his personal expenses every month. He manages to save atleast Rs.10,000 every month and wants to invest the same.
Mr.Raghu aged 62 was in a senior position in a public sector bank, where he served for over 22 years and had opted for voluntary retirement. He received Rs.10 lakhs as total benefits (there is no pension in this case) from the bank after voluntary retirement settlement. He does not own any assets but has investments worth Rs.20 lakhs (10 lakhs in fixed deposits, 5 lakhs in stocks and 5 lakhs in gold).
In addition he has around Rs.2 lakhs in bank account to take care of his daily expenses. He is partially dependent on his daughter who supports him whenever required. His daughter is married and lives in a separate household in a different city.
Deploying Retirement Funds – Investing Retirement Money
In case 1 as well as case 2 the individual is looking to deploy his retirement funds. However, the nature of the cases are different.
Case 1: Sanjay has regular income but needs some avenue to save or invest
Case 2: Raghu has a lump sum saving, but he needs to invest and create a regular stream of incomes
The key difference between case 1 and case 2 lies in the fact that Sanjay has income that is sufficient and comfortable for survival because he earns Rs.25,000 per month for the rest of his life. This will gradually increase as Government employees are eligible for hike in dearness allowance, which also compensates him for increased cost of living.
Sanjay’s regular income and upkeep is automatically taken care by his pension, which works on auto pilot. This pension is also known as perpetuity (perpetual annuity), which pays regular cash flows for the entire life span. Raghu’s case is different because he receives a lump sum settlement, and the onus is on him to invest in the right avenue to create a pension or income stream.
Retirement Money – Investment Options
1. Senior Citizens Savings Scheme (SCSS)
This is suitable for both Sanjay and Raghu. Raghu has to opt for a quarterly or monthly interest payment given his regular income or cash flow requirements. He can earn an interest rate of 9% p.a. (as an Example).
Sanjay on the other hand need not opt for regular interest payouts, instead he can opt for semi-annual or annual interest to earn more interest, given the fact that his regular income is sufficient to take care of his daily requirements.
A maximum of Rs.15 lakhs can be invested in senior citizens savings scheme. Raghu can invest his retirement benefits in a senior citizen’s savings scheme.
(For more details about SCSS visit RBI site)
2. Fixed Deposit (FD)
This is the second best option, but given current interest rates FDs seem to offer a better deal of 10% p.a or higher. Fixed deposit may not be offering these high rates forever, because interest rates can decline as well.
So when rates decline over the next few years one can make incremental investments in SCSS. Further, people who have exhausted the Rs.15 lakh limit can invest further in SCSS in the name of spouse or they can invest in fixed deposit.
If you want to lock in the high rates of say 11%, then you can look at investing in deposits with a term of 2 years or longer, so that you enjoy the benefit for few years in future.
Here you must make sure that you don’t require the money for the next few years, else you may have to bear the penalty for premature withdrawals.
3. Annuity/Pension Scheme
This is a scheme offered by mutual funds or insurance companies where one can invest a lump sum and get regular cash flows or returns for a specified period. For instance Raghu who received Rs.10 lakhs as benefits can invest in a pension scheme and get Rs.10000 every month as pension (the numbers are examples shown purely for illustrative purposes).
But here one has to stay away from unit linked plans that combine insurance and investments and also have a pension plan thrown combined in to one piece. The general suggestion is to opt for a pure no-frills pension plans. For insurance or investments you can look at other options. A pure annuity will provide regular income to you for chosen term say 5, 10, 15 or 20 years.
4. Post Office Monthly Income Scheme (POMIS)
This is an avenue offered by post office to earn monthly cash flow. Interest rate offered is 8% p.a., which is paid every month. In addition to interest there is a 5% bonus on maturity.
The catch here is a lock in period of 6 years, during which your investment will get locked. However, premature withdrawal is allowed after 1 year with a penalty deduction of 2% of deposited amount, while for withdrawal at any time after 3 years a penalty of 1% of the deposited amount is deducted. The maximum permissible investment in a POMIS is Rs.4.5 lakhs for a single account or Rs.9 lakhs for a joint account.
5. High Risk Instruments – Stocks, Gold, etc.
This is not recommended after retirement because these carry a higher risk and one cannot only lose returns but also lose significant portion of their principal or capital invested. Ideally you should have planned well in advance and invested in these a few decades before retirement.
For instance Mr.Raghu has been investing in stocks and managed to accumulate and grow his investment to a level of Rs.5 lakhs, and a similar amount in gold ETFs.
I am including high risk instruments here to tell you that you should still retain these investments post retirement so that you have a portfolio that can beat or atleast match inflation.
Although fresh lump sum investment in equities or risky assets is not recommended, one can do this incrementally whenever there is a surplus savings available.
For those who wish to invest retirement money in mutual funds ,Systematic Investment Plans (SIP in mutual funds) can be used to make gradual investments, while Systematic Withdrawal Plans can be used to make gradual withdrawals.
6. Property Matters
If you have a home or property you should try living in your home to save on rents and to avoid the uncertainty of higher rents and inconvenience of moving from one rented premises to another. For those who have a bigger property with two units or homes, you can live in one unit and rent out the other thereby enabling you to earn some income out of your property.
In today’s era of nuclear family system and breakdown of traditional family values, it is not surprising to find older people with property/income who get a nice or royal treatment from their sons/daughters, while other elderly people without property/income end up being additional furniture in the house. Sounds too harsh right? So this is reason good enough to urge you to plan for your retirement.
However, if you have retirement money in hand – you are on the right track, but find a good way to deploy it in safe avenues for your genuine expenses and upkeep in twilight years.
Now that you have reached the retirement phase of your life, your retirement money and investment profile will be more focused on safety, regular returns, liquidity and flexibility. When you were younger, you could afford to take some risks to gain higher returns over a period of time. When you get older you don’t have this option.
As discussed in our case, Sanjay has to just invest small amounts in safe avenues and get regular returns, because liquidity is not an issue and he has regular income to survive on. On the other hand Raghu has to create an income stream to survive on, so he has to invest a higher corpus to earn regular income.
The most important message for youngsters and middle aged is to use their time and skills to invest in growing assets such as equity, property, gold, etc systematically over the years. As you get older these avenues will start delivering good returns in cycles – for instance gold may do well in a year, while stocks plummet or property does well while other assets may offer meager returns.
We are not trying to see whether Raghu or Sanjay is better, but rather showing you two different cases which need a tailored solution or approach that can be achieved by consulting with a financial advisor. A successful retirement does not just end with accumulating a huge retirement corpus, but also requires you to deploy the corpus in the right avenues to take care of your last few years.
I wish all readers a happy retired life in the near or far future (as applicable). Also look forward to your comments and feedback on this article and like to hear your queries on this topic.