The riddle that is retirement planning

A guide to investing for your golden years

Despite all the talk surrounding the topic of retirement, very few in India who plan for retirement know what is in store for them. For most of us, that retirement number is a conundrum.

What’s the calculation

Let’s say, your current annual expense is ₹6 lakh, and you wish to retire next year. You would need to ensure that your accumulated savings can be ‘de-cumulated’ so as to yield at least ₹6 lakh per annum for the remainder of your life span. What are the options that are currently available to a retiree (age 60 years)?

Bank deposits

You can invest the money in a bank deposit. If you choose the longest tenure available in SBI — 10 years — you will be eligible for an interest rate of 7.35 per cent (as of March 29, 2019). Thus, for receiving a yearly interest payout of ₹6 lakh, you will have to invest ₹81.63 lakh.

This income will be entirely taxable and at the marginal tax rate. If the interest rate declines after 10 years, you will then have to add to the corpus to get the same annual income.

Annuities

You can invest the entire money and buy an immediate annuity. This comes with multiple options; here are two.

a) Straight life annuity: Under this option, the entire investment is used to provide an annuity for the entire life time of the annuitant (the investor). Once the annuitant dies, the annuity stops and no amount is paid to the nominee.

Currently, under this option, LIC’s Jeevan Akshay VI (the largest-selling annuity) pays 8.93 per cent of the invested amount annually to the investor. This income will be entirely taxable at the marginal rate.

b) Life annuity with return of purchase price to survivor: Under this option, the entire investment is used to provide an annuity for the entire life of the annuitant. Once the annuitant dies, the annuity stops and the original invested amount is paid to the nominee. Currently, under this option, Jeevan Akshay VI pays 6.6 per cent of the invested amount annually. Hence, in order to receive a yearly payout of ₹6 lakh, you will have to invest ₹90.9 lakh. This income, too, will be entirely taxable.

Debt MFs

You can make a systematic withdrawal (SWP) from a debt mutual fund. The catch here is that returns on an MF can fluctuate and are not guaranteed. You will have to pay 20 per cent LTCG (long-term capital gains) tax after indexation if you hold the units for more than 36 months.

Equity MFs

You can make an SWP from an equity MF. However, the risk is much higher. This is more tax-efficient though, as all equity MFs held for a period of over 12 months are subject only to 10 per cent LTCG tax if the gains cross ₹1 lakh. However, the volatility again makes this unsuitable for many investors.

Govt securities

You can invest the entire amount in a 10-year G-Sec. Government securities are backed by sovereign guarantee and are risk-free, if they are held till maturity. The current rate for a 10-year G-sec (7.17% GS 2028) is 7.46 per cent (as of March 29, 2019). Hence, the amount required to be invested under this option is ₹80.53 lakh. However, the returns under this option are entirely taxable. It also exposes you to risk of more investment needed after 10 years.

SCSS

You can opt for the Senior Citizen Savings Scheme (SCSS). Its current rate of interest is 8.7 per cent.

Here, the tenure can be extended by another three years after five years, but the rate applicable shall be the one applicable at maturity (after five years).

You can take the redemption amount and open a fresh SCSS account if you are comfortable with the new applicable interest rate. The maximum amount that can be invested by you in SCSS accounts is ₹15 lakh.

Tax-free bonds

You can buy tax-free bonds from the secondary market, since fresh issue of such tax-free bonds has dried up after 2015.

However, the residual maturity will not be for a period of more than 15 years and the effective yield will be around 6.25 per cent. These are a good option if you are at the highest tax slab.

LIC Vaya Vandana

LIC’s PM Vaya Vandana scheme provides a maximum annuity of ₹1.2 lakh per year, that is, you can invest a maximum of ₹14.45 lakh under this scheme.

However, the tenure is 10 years.

POMIS

Post-Office Monthly Income Scheme or POMIS currently provides a return of 7.3 per cent per annum.

However, the maximum amount that can be invested in this scheme is ₹9 lakh. The tenure is just five years.

Real estate

Buying real estate with the objective of creating rental income is another option that retirees consider.

But real estate comes with its attendant legal problems that a person looking for peace in his/her golden years may want to avoid.

The rental yields are very low in India and this problem is exacerbated by the attendant legal and maintenance problems that come with investing in residential real estate.

It is suggested that individuals choose an option(s) as per their circumstances and preferences. Don’t forget to factor in inflation.

(The writer is Chief Marketing and Digital Officer, DHFL Pramerica Life Insurance. This should not be construed as financial advice; the reader is advised to consult a financial advisor before committing retirement funds.)

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