Retirement is a crucial stage of life that marks the transition from full-time work to leisure. It is a time when individuals are no longer actively working and are instead able to enjoy the fruits of their hard work done over the years. However, retirement can also present financial challenges, as it is a time when individuals may no longer have a steady source of income. This article throws light as to why it is important for individuals to plan for retirement and ensure that they have a regular income during this stage of life.
Having a regular income during retirement is important for a number of reasons. For one, it allows individuals to maintain their standard of living and continue to pay for their basic expenses, such as housing, food, and healthcare. Without a regular income, individuals may struggle to meet these expenses and may be forced to rely on savings or other forms of assistance.
Additionally, having a regular income during retirement can provide financial security and peace of mind. It can help individuals feel more financially stable and able to handle unexpected expenses or emergencies.
There are a number of ways that individuals can plan for retirement and ensure that they have a regular income during this stage of life. Some options are mentioned below:
BANK FIXED DEPOSITS
Bank fixed deposits are considered safe and offer guaranteed returns depending on the duration selected for investment. This is a suitable investment for risk averse investors and those who require a stable source of income. Investment in fixed deposits can be a good short-term option. However, from a long-term perspective, this investment option is not very attractive since it fails to beat inflation and the interest received on fixed deposits is taxable at the investor's applicable tax rate, thus making them tax-inefficient. Inflation is a serious risk for investors who have their assets sitting in fixed deposits because it can erode the purchasing power of their wealth over time.
To understand why this is the case, let's consider the following example:
Imagine that you have Rs 100,000 invested in an FD that earns a fixed interest rate of 7% p.a. and if you happen to be in the 30% tax bracket, then the net interest rate you receive would be 4.90% (7% - 30% tax). If the rate of inflation during this period is 6%, the purchasing power of your investment will have declined. This is because the prices of goods and services will have increased by 6%, meaning that it will take more of your money to buy the same things. Besides, investment in fixed deposits also carries reinvestment risk (i.e., risk that an investor will not be able to reinvest at the same interest rate as the original investment).
POST OFFICE MONTHLY INCOME SCHEME (POMIS)
This is a savings scheme offered by the Indian Post Office that allows investors to earn guaranteed fixed monthly interest on their investments. POMIS is a safe option as it is backed by the government, but it offers relatively low returns compared to other investment options. POMIS accounts can be easily transferred from one post office to another. The maturity period for this scheme is 5 years, but the account holder has the option to continue earning interest for an additional 2 years after the maturity period has ended, as long as the proceeds from the matured account are not withdrawn. This scheme may be suitable for those looking for a stable, low-risk investment that provides a regular income. However, it may not be suitable for those looking for higher returns or more flexibility in terms of investment tenure or amount.
PRADHAN MANTRI VAYA VANDANA YOJANA (PMVVY)
This is a guaranteed pension scheme launched by the Government of India for senior citizens aged 60 years or above and is managed by the Life Insurance Corporation of India (LIC). The scheme has a maturity period of 10 years, during which the pension is paid to the policyholder on a monthly basis. The scheme also provides for a return of investment amount on maturity, along with the final pension installment. The pension payments are however released only after submission of Life Certificate to LIC.
SENIOR CITIZENS SAVING SCHEME (SCSS)
SCSS is a government-backed small savings scheme that is guaranteed to provide a high return on investment for senior citizens (above the age of 60 years). The objective of this scheme is to provide senior citizens with regular income post retirement. This scheme is a safe and secure investment and provides high interest rate as compared to fixed deposits. The process of investing in SCSS is straightforward and can be done at any authorized bank or post office in India. Additionally, interest earned through SCSS is paid to the account holder on a quarterly basis, with payments occurring on the first day of April, July, October, and January each financial year.
MUTUAL FUNDS
Investing a good portion of your money in mutual funds can be a great choice from a long-term point of view as they provide very good returns. Equity investments tend to generate higher returns than other investment avenues over the long-term. Therefore investing in equity mutual funds can be a great idea for wealth creation. Mutual funds offer a variety of options, including hybrid schemes, which allow investors to choose between dividend and growth options. While dividend options offer the potential for regular income, they are taxable as per the investor’s tax slab. A better option could be opting for a systematic withdrawal plan (SWP) that allows an investor to grow their investment under the growth option for a period of time, allowing the gains to be taxed as long-term capital gains. After this period, the investor can instruct the fund to redeem a fixed amount every month, providing certainty in both the frequency and quantum of income. This approach can also be more tax efficient compared to the dividend option of mutual funds. For those looking to generate regular income, it may be advisable to allocate a portion of their investment to hybrid mutual funds, while also considering traditional options such as fixed deposits and senior citizen savings schemes.
Thus, by taking a balanced approach and considering factors such as capital growth and tax efficiency, investors can help ensure that their retirement income is sustainable and meets their long-term needs.
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