Fixed deposits aren't enough, senior citizens must invest in other avenues

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The Union Budget has allowed a tax deduction of up to Rs 50,000 to senior citizens on interest earned from deposits in banks, post office and co-operative banks. While senior citizens should take full benefit of this deduction, they should not overlook the need for a diversified portfolio to help them beat inflation.

Decide debt-equity mix first: How much of a senior citizen's retirement corpus gets allocated to debt should be determined as follows. First, use the 100 minus age rule. This would tell you that at 60 years, 40 per cent should be allocated to equities and 60 per cent to debt. This allocation should be fine tuned further depending on a few other factors. 

The first is how much cash the senior citizen needs to generate each month to meet his expenses. This money should be generated out of his fixed-income corpus. The second factor is the person's risk appetite. "If a senior citizen doesn't want to see any erosion of capital due to market volatility, he should have 0-15 per cent allocation to equities. If he is okay with some volatility because he wants growth, he may have 70 per cent in debt and 30 per cent in equities. Those who have a corpus in excess of their needs may even invest 50 per cent in debt and 50 per cent in equities," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. The portion of a senior citizen’s corpus that he plans to pass on to his children may be kept in equities. 

Taxes are another key consideration. Seniors should avoid generating income beyond their needs to avoid unnecessary taxation. Affluent senior citizens, for instance, need to be wary of generating excessive income beyond Rs 1 million, as it would push them from the 20 to the 30 per cent tax bracket.  

Some money should also be invested to create a health corpus, using instruments like a fixed deposit (FD), liquid fund or ultra short term fund, over and above the health insurance policy.

Finally, those who have just retired should have a higher allocation to equities compared to those of a more advanced age.

Use the right debt instruments: After the Budget, senior citizens should use FDs, Senior Citizens Saving Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (PMVVY), and in case of those in the highest tax bracket, tax-free bonds and debt mutual funds. 

Today, while the State Bank of India offers 6.75 per cent interest to senior citizens on a one-year FD, banks like RBL offer 7.6 per cent. At an interest rate of 6.75 per cent, an individual can invest around Rs 740,000 to exhaust the Section 80TTB limit. As for choosing the right FD, Rahul Jain, head, Edelweiss Personal Wealth Advisory, says: “Spread your FDs across banks. Choose banks that are fundamentally strong and don't blindly chase those offering higher rates of interest.” The next instrument a senior citizen should opt for is SCSS. An individual may invest up to Rs 1.5 million in it. The spouse, if she has a separate income stream, can invest another Rs 1.5 million. It offers an interest rate of 8.3 per cent per annum payable quarterly for five years. Investment in this scheme also qualifies for 80C deduction. Interest income from it is, however, taxable.

The Pradhan Mantri Vaya Vandana Yojana (PMVVY) from the Life Insurance Corporation of India should be a senior citizen's third option. In Budget 2018, the finance minister doubled the investment limit per family to Rs 1.5 million. The scheme provides an assured return of 8 per cent per annum for 10 years.   

One attractive feature of both SCSS and PMVVY is that the rate of return remains fixed for the entire tenure. Senior citizens in the highest tax bracket should also consider tax-free bonds purchased from the secondary market, where they are currently available at a yield of 6.2 per cent. “Those in the higher tax brackets may also consider debt mutual funds because of their advantageous tax norm of 20 per cent tax with indexation,” says Anil Rego, CEO, Right Horizons. Those who don't need the cash flows from it may invest in Public Provident Fund (PPF) for its 7.6 per cent tax-free return.   

Allocate to equities: Some allocation to equities is a must to ensure that a portion of the corpus is able to combat inflation. Senior citizens may use large-cap exchange traded funds, large-cap active funds, multi-cap funds, and dynamic asset allocation funds. In very large corpuses, small allocations may also be made to mid-cap funds  and international funds. Sell equities and reallocate to debt whenever markets run up.   

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