For many, retirement equals the end of the earning phase. Thus, forming a post retirement portfolio that has a mix of market linked and fixed income instruments is crucial and may be challenging. Challenge here is to build an adequate retirement corpus through investments in different types of pension plans as per your lifestyle, monthly mandatory expenses, and life expectancy.
Checkout some of the important types of pension funds, which you should include in your post retirement portfolio:
Regulated by the PFRDA (Pension Fund Regulatory & Development Authority), NPS is one of the popular options if you look to avail a regular pension post retirement. During your working phase, you can contribute towards the NPS pension account. The funds in this account get invested in both equity and debt markets according to your choice. Once you reach your retirement age, you can withdraw a portion of your investment in lump sum form and use the rest for buying annuity, which guarantees a regular income.
- SCSS or Senior Citizens’ Saving Scheme
It is probably the first preference of many. SCSS is a must-have instrument in your retirement portfolio. As the fund’s name suggests, the scheme is just available to the senior citizens or the early retirees. You can avail SCSS from a bank or post office once you are above 60 years of age. SCSS has a 5-year tenure, which can be extended further by 3 years once the fund matures. Currently, rate of interest in SCSS is 7.4 % per annum, quarterly payable. Upper investment limit of SCSS is Rs 15 lakh while the lower limit is Rs 1,000. Capital invested and interest payout are assured and have sovereign guarantee from the government. SCSS investment is eligible for the tax benefit as per Section 80C and the fund also permits premature withdrawal.
- POMIS or Post Office Monthly Income Scheme Account
POMIS is a 5-year plan with an upper cap of Rs 4.5 lakh if you have a single account while Rs 9 lakh in case of joint account. Rate of interest is set every quarter and presently it is at 6.6 % p.a., payable monthly. You get the assurance of guaranteed returns in the form of interest each month. However, the returns attained are not inflation beating and usually may not be higher than other fixed income instruments like bank fixed deposits. Alongside, POMIS investment does not qualify for tax benefit and interest is taxable fully.
- Bank FD (fixed deposit)
Bank FD is the next common choice amongst retirees. Fixed returns, capital safety, and fund protection of up to Rs 5 lakh by DICGC are features that make you opt for this option. However, the rate of interest over the past few years is declining. Presently, for senior citizens, the bank fixed rates can go up to 7.30% p.a. in case of small savings banks, up to 7.55% p.a. in case of private banks and up to 6% p.a. in case of public sector banks. Note that for bank FD, the senior citizen receives an additional 0.25-0.50% p.a. based on the bank.
- MFs or Mutual Funds
As retirement income is subject to inflation, keeping a part of your funds in mutual funds, particularly in equity mutual funds is important. Total switch from equity to fixed income investments when approaching retirement can enhance the risks of exhausting your retirement corpus. Moreover, what is worse is entirely sticking with fixed income instruments throughout your working life in hopes of generating inflation beating returns. Fixed income investments can never beat inflation.
As fixed income investments rarely overcome market rates, higher medical expenses and increasing life expectancy can further hasten your retirement corpus depletion. Instead of switching entirely to debt funds from equity when nearing your retirement age, you must adopt a steadier approach. As per this, you must initially estimate your annual expenses in your retirement years and then transfer your funds every year to fixed income instruments once you are about 2 years away from your retirement age. Doing this will maintain a considerable equity exposure during your post retirement years, which ensures higher inflation adjusted growth for your retirement corpus and lower risk of exhausting your funds in your lifetime.
Conclusion
Pension plans help shape your income into investments for your retirement years. Different instruments come with different features that aim to meet different financial goals, and mandatory expenses post your retirement form the adequate retirement corpus. This further allows you to attain a financially stable and secured retired life.
