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Unlike older times, retirement planning is essential now

Author: Team Finapolis/Thursday, March 29, 2018/Categories: Financial Planning

Unlike older times, retirement planning is essential now

It has been the custom for generations for elderly parents to depend on their children for financial support after retirement. They spend all the money they earn throughout their lives on giving their children a very comfortable life. With changing times, parents are realising the importance of being independent even in their old age and have started keeping aside money for post retirement expenses. With possibility of rising medical bills and unexpected expenditures, it is important to engage in retirement planning at an early stage and give the saved money a chance to grow. Thus the popularity of retirement funds is on the rise.

Here are some investment options available for retired individuals:

Post Office Monthly Income Scheme

Post office monthly income scheme or POMIS gives low returns due to a low interest rate of 7.5%. This scheme is also fully taxable.

POMIS is a five-year investment plan with the cap of Rs 9 lakh for a joint ownership and Rs 4.5 lakh for single ownership. The minimum amount that must be deposited is Rs 1,500. The interest rate is set each quarter and is currently at 7.8% per annum, which is payable monthly. One can prematurely close the account one year after it is opened, at a 1% or 2% deduction of deposit.

This scheme is guaranteed by the Government of India. A major benefit of this scheme is that it operates automatically. One can request an automatic transfer instead of paying a visit to the post office each month.

Senior Citizen Savings Scheme

This scheme is the government’s bid to offer more benefits to senior citizens. It can only to be opened by an individual of more than 60 years of age or 55 years or more of he/she has taken VRS. A few months back, government adjusted the investment age to 50 years. A single as well as joint account can be opened.

The tenure of this scheme is 5 years but can be extended a further 3 years after attaining maturity. The interest rate is decided by the government and set every quarter. The rates currently stand at 8.4%, having fallen from nearly 10% in the past. This scheme can be opened in certain banks as well, along with the post office.

The maximum investment cap on this scheme is Rs 15 lakh. The scheme is eligible for tax benefits and also allows for premature withdrawal of funds.

Bank Fixed Deposits

Bank FDs have been a popular investment choice for the retired and others since time immemorial. Its easy operation and fixed returns make it an ideal choice for retired individuals. The past few years have seen a decline in FD interest rates, but it still remains a better choice than savings accounts.

Banks usually offer a 7.5% interest rate for 10 year tenure. Some banks provide an additional 0.25-0.5% per annum for senior citizens.  A major benefit offered by FDs is their flexibility. In other government schemes, the money is locked away for a certain period till maturity, thus having low liquidity. In an FD, one can spread the money across different accounts with different maturity dates thus providing high liquidity.

There is also an option of tax saving fixed deposit. But it requires the investor to lock in the money for a 5 year period without the option of withdrawal during tenure. Tax-saving FDs also have lower interest rates as compared to the regular ones.

Mutual Funds

Mutual funds offer better returns than most other investment options. Retirees can invest a part of their retirement fund in equity-backed mutual funds across various risk profiles to minimise risks. As a retiree has no continuous source of income, it would be advisable to steer clear of volatile funds such as small and mid cap funds.

As debt mutual funds offer easy liquidity, it makes it an ideal choice for retired individuals.

Tax-free Bonds

Tax-free bonds cannot be bought in the primary market and is only available in the stock market. These are long term investments that mature after 10-20 years. As the name suggests, this scheme is completely tax free but low on liquidity. Another disadvantage is that this scheme has annual payouts which may not meet the monthly money requirements of a retiree.

Despite its disadvantages, it has the highest safe ratings and thus features in a retiree’s portfolio.

Depending on the available corpus during retirement, individuals can choose from safe investment options like fixed deposits to a little more risky equity-based investments such as mutual funds. 

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