Individuals aged 60 or more may invest in this scheme. Those aged 55 years or more may also invest provided they have retired and they invest their retirement benefits in it within a month of receiving them.
The scheme allows you to withdraw prematurely, but after levying a charge: 1.5 per cent of the deposit if you withdraw after one year, and 1 per cent after two years. The scheme can be extended for three years.
8 per cent Government of India (GoI) Savings Bond: It pays an annual interest rate of 8 per cent. There is no limit as to how much you can invest. You can buy it from nationalised banks, some private sector banks such as HDFC Bank and ICICI Bank, and offices of the Stock Holding Corporation. You can buy them any time. However, these bonds are not listed, so you can't exit by selling them in the secondary market.
Post Office Monthly Income Scheme (POMIS): It pays an interest rate of 7.5 per cent per annum. Unlike SCSS, no tax deduction benefit is available here. You can only invest up to Rs 4.5 lakh individually and Rs 9 lakh in a joint account. You can withdraw your money prematurely but have to pay a charge: Two per cent if you withdraw after one year but before three years, and one per cent after three years.
Systematic withdrawal plans (SWP) of debt funds: You can also generate a regular income through an SWP in a debt fund. “The debt fund for an SWP should have minimal volatility. Opt for an ultra-short-term debt fund where the duration is low and credit quality is high,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA). SWP in higher duration funds, or those having high credit risk, should be avoided. Average return from ultra-short-term debt funds has been 8.01 per cent over the past 10 years, but has fallen to 5.76 per cent over the past year. Investing three years prior to retirement will get you indexation benefits as soon as you start withdrawing.
Immediate annuities of life insurers:
Annuities pay you a fixed amount for the rest of your life. In some plans, they can give a pension to your spouse, too, for the rest of his/her life. They guard you against reinvestment risk and their rate of return remains unchanged even if interest rates go down. However, they are susceptible to inflation risk. As time goes by, the purchasing power of the fixed amount paid to you diminishes. The rates of return of the products available currently are also lower (see table) than that of many of the products mentioned earlier. Annuities also lock up your money for the rest of your life. “Only people who can't manage their money, that is, invest in other options to generate higher returns, should invest in annuities,” says Santosh Agarwal, head of life insurance, Policybazaar.com.
Post-retirement portfolio: A retiree needs to be mindful of a few risks when planning his post-retirement portfolio. One is longevity risk, that is, the risk that you may outlive your corpus. Annuities help you deal with this risk. The second is inflation risk. A small portion of your corpus, 20-30 per cent, should be invested in growth assets, like equity funds, to deal with it. The third risk arises from volatility.
An example will illustrate this point. Suppose you have a corpus of Rs 2 crore and an annual expense of Rs 10 lakh. Say, this corpus earns a return of 7 per cent a year, or Rs 14 lakh. You withdraw Rs 10 lakh and are left with a corpus of Rs 2.04 crore at the end of the year. But what if the corpus gives negative returns of 7 per cent for two consecutive years, and you keep withdrawing Rs 10 lakh each year? At the end of two years, you will be left with Rs 1.54 crore, a decline of 23 per cent. Now, it needs to grow by 30 per cent to touch the Rs 2-crore mark again. “When you withdraw from a corpus that has declined, you make your loss permanent. Most retirees can't tolerate high erosion of capital. So, the portfolio they are withdrawing from should be built of stable products,” says Raghaw.
Periodicity of payout by the instrument is also important. “Someone who gets a pension may not mind a payout every six months. But someone who doesn't, will need a monthly payout,” says Mumbai-based financial planner Arnav Pandya.