In India, there are several investment tools available for investing money. Every Indian citizen invests his money in these investment schemes according to his preference. But is the investment the same for the working employers and the retired individuals? No, it’s not, as the retirement corpus should be generated in a specific way. This corpus should be inclusive of funds that generate a regular income source post-retirement. Keeping all this in mind, many individuals may still find themselves in turmoil about which scheme to invest in. Before making this decision, let us look into the details of what makes a good corpus.
This article aims to convey the importance of retirement corpus. Every retired individual should have accumulated savings by the time of retirement. These funds are used to meet expenses when there is no stable source of income. Through this article, I will enlighten the readers about the investment procedure of the retirement corpus.
First, we will look at the investment process before and after retirement. Then we shall learn how to plan the retirement corpus by considering an example. The definition and the process of building an investment portfolio will be discussed later. Finally, the article will conclude with the investment options that can be availed by every retired individual.
The Investment Process Pre And Post-Retirement
During the youth, every individual works hard to earn money. The income generated is used to meet expenses. These are daily expenses, financial goals, and luxury expenses. Once these expenses are satisfied, the remaining amount is classified as monthly savings. These savings may be invested in investment schemes. According to the plan opted, the money will be accumulated till retirement. Once an individual has retired, this means that he will lose his primary source of income. But the investments made during his working age will start bearing fruits. As per the investment plan, the retirement corpus would have grown by the time of his retirement. This amount generates the monthly income so that the retiree can meet all his expenses post-retirement.
Now let us understand the difference between the situation before retirement and after retirement.
1. Before Retirement
The priority before retirement is to build a retirement corpus. In this stage, individuals earn money by working. The income generated is divided to meet all the expenses, including savings. Part of the money is also invested in systematic investment plans. These are several other growth-based investing options that are available in the market. With time the corpus accumulated through investment grows.
2. After Retirement
During this stage, the retiree will be urgently in need of a stable source of income—the retirement corpus accumulated during the pre-retirement period when working can be utilized to its full potential. A well-built investment portfolio should consist of investment options that generate a good income source so that he can fulfill all his needs and wants. Next is the protection of the corpus. He should ensure that the corpus is safeguarded from fraudsters and other investment options designed to trap them. Along with this, make sure that your capital grows with time. This can be achieved through several equity-based schemes to generate huge returns.
How To Plan The Retirement Corpus?
Very often, many people invest the entire retirement corpus in a safe fixed-income scheme. But the major issue revolving around such deposits is the effect of inflation. To understand more about the effects of inflation on the retirement corpus, let us look at an example.
Mr. Mendes is a sole believer that his retirement corpus is the safest in the fixed income investment. So, he decided to invest his money in this scheme with an interest rate of 8% per annum. The accumulation of his funds after 1 year will sum to Rs.50 lakh. His annual returns are Rs.4 lakh, which comes to Rs.33,333 per month. He uses this lump sum to lead a good life. The utilization of the entire monthly income to meet every need and wants will become a habit. This will eventually turn into his lifestyle, and he will wish to maintain it. But with the inflation rate of 4%, he will not be able to meet all his desires in the years to come. Let us see how.
It is clear from the graph that Mr. Mendes will need an addition of 1 lakh to his interest. Over the years the inflation has increased his expenses. Thus, to continue maintaining the same lifestyle, he will want more from his retirement corpus. As his expenses rise, he withdraws money from the initial capital of Rs.50 lakh. This implies that the coming years’ capital will be less, and the interest earned from this corpus will further fall.
If he continues to withdraw the money from the proceeding capital, he may exhaust his retirement corpus. To prevent such an ill-fated situation, Mr. Mendes should have consumed only the interest earned from the capital. He shouldn’t have withdrawn the capital money. Due to the inflation rate, he should have compromised with his expenses by optimizing his lifestyle. But he was too rigid to do so and decided to stick to his current regime that led to his downfall.
This example is a great lesson to all those who only invest in fixed-income schemes. Every individual should take responsibility for himself to plan and prepare himself before making any decisions. Create your investment portfolio as per your needs. Make sure that it is flexible and spread across various investment tools.
The investment portfolio of an individual should be strong enough to meet all his priorities. It means that he should have made sufficient investments to assist him post-retirement. An investment portfolio is a combination of assets. These assets could be located in different banks or varying investment plans in the same financial company. The choice of investment plans to meet post-retirement needs is limited. But every individual should make the right choice for himself to avoid stress after retirement. As it is important to invest, so is the spread of the money among different assets. Diversification is a must. There is no restriction to this factor as the investors can achieve it according to their comfort.
Every individual has different priorities. Thus, the choice of investment schemes will differ from person to person. The composition of the investment portfolio lies upon the priorities and the weightage given to it. For some individuals, the priority may lie with protecting the corpus. For others, Corpus’ growth may be a concern. So, let’s see some examples regarding the difference in priorities.
1. If The Size Of The Corpus Is Too Small
Let us consider a person who has retired with limited assets. This includes only retirement money and does not involve a house. In this case, the person will have limited funds. A major portion of these is utilized for purchasing a house. The remaining money is used to generate income. So, there is no room for corpus protection and corpus growth. Since the retirement corpus is too small, the individual’s priorities are limited only to income generation.
2. If The Size Of The Corpus Is Moderate
With a high corpus compared to the first example, this individual will be better positioned to give thought to income generation and corpus protection. He does not have any liabilities to sort out. Thus, after utilizing the retirement corpus to generate income, he can use the residual amount to protect the corpus by investing in it. This will extend the life of the retirement corpus.
3. If The Size Of The Corpus Is Big
In this case, the retirement corpus is large enough to meet all the retired individual’s priorities. Once the income is generated by investing in investment tools, corpus protection is facilitated by regular investments. Next, the corpus growth is also ensured as more residue funds permit this growth.
As a word of caution, care should be taken that post-retirement the limited monetary funds should be handled with care. The individuals should not perform any trials with these assets. They should be confident about their investment schemes. It should guarantee returns and subside risks. Make sure that the handful of saving in possession are multiplied by the plans of your choice.
How To Build An Investment Portfolio?
Three basic steps are involved in building an investment portfolio. These are as follows.
1. Configuring The Retirement Corpus
Configuring the funds requires a lot of time, dedication, and determination. People may go through a lot of hardships to build a good retirement corpus. They should try and gather as many funds as possible to lead a perfect life post-retirement. When the individual is nearing retirement or already retired, he should consolidate all the schemes and keep track of the corpus’ growth so far. This will help him to fortify the retirement corpus.
The size of the corpus should be pre-defined. This implies individuals should calculate their expenses that account for the size of the retirement corpus. The priorities should be set. These are income generation, corpus protection, and corpus growth. Besides setting the priorities, expense estimation, and the life expectancy of the individual is also mandatory. So, the retirement corpus should be arrayed in a manner that generates sufficient income for retirees. The income should enable them to meet their daily and luxury expenses until or over the life-expectancy.
There are three stages in configuring the retirement corpus. They are as follows.
i. Consolidating The Retirement Corpus
Individuals may opt for different routes to establish a good retirement corpus. For some individuals, the retirement corpus may be sponsored by their employers, while others may generate one for themselves. The Employment Provident Fund (EPF) is a scheme registered by every company with a minimum of 20 individuals in the workforce. Under this scheme, an employer opens an EPF account for his employee. Thus, the employer, as well as the employee, contribute towards this account. The corpus generated through this scheme is employer-sponsored.
The retirement corpus that is self-made can be created through various other schemes like National Pension Scheme (NPS), Pradhan Mantri Vaya Vandana Yojana (PMVVY), Senior Citizen Savings Scheme (SCSS), mutual funds, savings account, and other retirement policies. If you had lent your money to any relative or friend, then retirement is the right time to recollect the money. Further, some individuals may own real-estate properties or lands that are not performing well. These could be sold to liquidate the assets. The extra money generated through these assets could be used to add to the retirement corpus.
Consolidating funds is a simple yet tedious procedure. The funds should be accumulated in great detail. Make sure that the funds parked in several policies are not withdrawn prematurely. This will attract a penalty. Keep the funds until they mature. Doing so, you will surely get huge returns and generate a decent retirement corpus for yourself.
ii. Estimating Life Expectancy
While planning the retirement corpus, it is also important to estimate the life expectancy of an individual. In India, the retirement age is 60, but it may extend to 65 in some cases. So, a senior citizen is expected to live up to the age of 80-90. But with the advancement of medical sciences, the life expectancy of an individual may also be more. The key point here is that the retirement corpus should suffice for the retiree’s entire life span. He should not be struggling with his finances with five years of retirement.
iii. Estimating Regular Expenses
The monthly expenses should be estimated with precision, as this determines the size of the retirement corpus. Try and visualize your post-retirement life. Based on this, make a list of every expense. Take time to jot these expenses as it is a crucial step that will determine your corpus’ size. To simplify this procedure, categorize the various types of expenses that you are likely to make. The classification may be as daily, monthly, and yearly expenses or daily and luxury expenses. Include all the expenses from the grocery to transportation expenses. Rent payment, insurance premiums, bill payment, DTH, and mobile recharges, and so on. After you list them, sum the total to know the net annual expenses. As a precautionary measure, it is always better to add a sum of a few thousand bucks.
Apart from these daily expenses, senior citizens should also have health insurance and an emergency fund to cover unforeseen situations. The retirement corpus should not break at any cost. It the only means of income generation during retirement. If the size of the corpus is reduced, then the returns will also subside simultaneously. Therefore, make sure to avoid any circumstances that may force you to break the corpus. This includes a medical emergency or any other unexpected situations like damage to the house, sudden accidents, and so on.
Individuals need to prepare themselves for such a situation by having a medical cover and an emergency corpus specifically to serve this purpose. Health crises are unpredictable, but if one has health insurance, he can surely tide through it without breaking his retirement corpus. An emergency corpus should be inclusive of funds that are worth 4-6 months of expenses. They should be kept in any liquid funds that ensure great returns and pose a low risk.
2. Building A Retirement Portfolio
Before building a retirement, portfolio set your priorities. Know the number of returns you are looking for. Then invest your money in the policies that guarantee returns at that rate or more. After retirement, a retiree is likely to face several hardships. From a common perspective, make a list of these issues and then compare them with your situation based on your expenses. Some of the issues post-retirement are listed as follows.
i. Firstly, retirees do not work. They do not get a monthly salary to meet their daily needs. The retirement corpus isn’t the reserve to spend money to meet day to day expenses. It is the means of generating a regular income. Once invested in any of the investment plans, the retirement corpus can be successfully used to generate returns. But the choice of investment plan lies entirely upon the investor. He should go what to expect from the scheme to generate returns at a modest rate.
ii. Next is the ability to protect the retirement corpus money. Sometimes a retiree may only rely on the retirement corpus as he has no other assets to generate income. In this case, he has to make sure that the corpus is protected from every possible fraud. Secure your funds in any of the investment schemes which offer good returns. Make sure that you are aware of all the details of the scheme. Do not be tempted by the high returns offered by fraudsters. This may bring a lot of regrets.
iii. Finally, we have problems caused by inflation. Inflation is the greatest enemy of every investor. For retirees, it can have detrimental effects on their retirement funds. In Mr. Mendes’ case, we have already seen how inflation took a toll on his retirement corpus. Find out ways to defeat inflation. Optimize your lifestyle, compromise your expenses, and make sure you choose the right scheme with sufficient returns to your needs.
Now that we know the issues during the post-retirement period, let us find ways to curb them. Income generation, corpus protection, and corpus growth are the priorities of every retiree. But all these factors cannot have equal priority when it comes to meet building the retirement corpus. The level of priority should differ depending upon the financial conditions and the capability of taking a risk. Let us have a closer look at these three priorities.
a. Income Generation During Retirement
Now that we already know how to calculate the expenses let us learn to generate income regularly. The regular income generation should always be equal to the estimated expenses. The retirement corpus can be efficiently used to generate regular income by investing it in a risk-free investment scheme. These investment schemes should be flexible and generate good returns. Considering the example of Mr. Mendes, he had a corpus worth Rs.50 lakh. With the returns earned at the rate of 8% per annum, he would earn an income of Rs.4 lakh per year, keeping the inflation aside. To generate this income, he needed an investment plan that was generating the returns at a rate of 8%. So, he invested his money in the most suitable plan that enabled him to do so. There are many investment options available that can enable investors to earn returns of their choice.
b. Protecting The Retirement Corpus
The retirement corpus is the only means of survival for a retired person. If there are no other assets, they better hold on to the corpus with a lot of attention. Never risk these funds to satisfy your greed for more returns. There are many fraudsters and people with evil intentions in the real world who know that retired people have a huge chunk of the corpus. They may often manipulate your minds and try to lure you to invest your money into a booming business, share market, or other investment options that generate huge returns. But you should be smart enough to overcome such temptations and protect your corpus.
A good investment option is a fixed income scheme. It will surely prove to be a stable source of income for a given time. Make sure that you don’t compromise the safety of your funds. But don’t follow Mr. Mendes. He made a huge mistake by investing his entire corpus in a fixed income scheme. Divide your corpus into several portions and spread these portions across different investment tools. We will look into the benefits of this type of investing later in the article.
c. Growth Of The Retirement Corpus
Inflation will always reduce the value of your money. Therefore, the retirement corpus’s growth is important to compensate for the decreased amount due to inflation. The equity-based investment schemes’ returns will successfully be added to the capital income that will prevent the retirement corpus’s downfall. Considering Mr. Mendes and his retirement corpus, if he had invested these funds in the fixed income scheme and an equity-based tool, his situation would have been different.
Suppose he had invested 70% of his corpus in the fixed income scheme and the remaining 30% in an equity-based scheme. The 70% would have generated returns at the rate of 8%. The remaining 30%, i.e., Rs.15,00,000 invested in an equity-based scheme, would have generated returns at the rate of 12% after its maturity. The 15 lakh would become Rs.25 lakh, which is 10 lakhs more than the initial capital. These additional gains from the equity scheme are enough to compensate for the capital loss because of inflation. In this way, the retirement corpus will grow in size even though inflation is taking a toll on the fixed income scheme. This is one way by which investors can defeat inflation by using it for its benefit.
3. Conservative Withdrawal
The withdrawal of funds is also an important factor that affects the retirement corpus. It is highly recommended that that gains from the investment scheme should be withdrawn annually. For starters, withdraw 4 to 5% of the capital. You can increase the number by 1% from the previous years’ returns in the coming year. Do not exceed this limit by 6% at any time. It can affect the size of the retirement corpus and reduce the returns successively.
How To Prepare Before Investing?
Investing may seem a simple process, but it requires preparation before execution. The preparation involves the following steps.
1. The Collection Of Funds
This is the most crucial step for the preparation of investments. Without funds, one cannot make investments. Therefore, all the savings that are accumulated during the job should be collected. Once the primary source for investing is met, everything else will follow. Make sure that there are sufficient savings to make the investments from time to time.
For example, let us look into the details of a retired individual’s total savings in India.
- Cash in a savings account: Rs.1.5 lakh
- Fixed deposits: Rs. 4 lakh
- Provident fund: Rs. 25 lakh
- Gratuity: Rs.10 lakh
- Share: Rs.2 lakh
- Endowment plan: Rs.3 lakh
- Total: Rs.45.5 lakh
2. Estimating The Expenses
Keep track of all your expenses. Make sure that you are aware of how much you will need from the retirement corpus every month. The retirement corpus will not persist for an eternity. There will come a time when it will be exhausted. Thus, corpus protection and corpus growth are necessary. The corpus should be grown by investing regularly. This will ensure consistent income without any depletion.
Example: Let us look into the details of the expenses of a retired individual.
- Household expenses: Rs.15,000 per month
- Health: Rs.5,000 per month
- Other expenses: Rs.5,000 per month
- Total: Rs.25,000 per month
3. Quantify The Required Returns
Considering the examples we have just taken, the amount of money saved by the individual is Rs.45.5 lakh post-retirement—the monthly expenses of this individual sum up to Rs.30,000 per month. To generate a sum of Rs.25,000 per month, the investment scheme should provide returns at 6.5% per annum. The result is obtained as follows:
Net Returns= Monthly expenses x
= 25,000 x
= 6.5% per annum
Now that we know our requirements, we should choose the right investment tool to fulfill the retirement needs.
Where To Invest The Retirement Money?
In India, there are several investment options for retirement, which guarantee a modest interest rate. The individual can invest in any of these tools or spread their funds into different schemes. The tabular column given below shows the investment of an individual across various schemes. Let us see how the retirement corpus is generated.
The table shows the details of investment spread across 8 investment plans. Once you know your monthly expenses and prepare with the lifetime savings, your job is half done. The distribution of funds in these schemes is the key to income generation, as seen from the 1st column. The distribution of the total savings is well mentioned. The money will remain in these deposits for a long period. Most of these schemes do not permit pre-withdrawals. After the end of the tenure, the corpus is disbursed. The disbursement may be monthly or quarterly, depending on the various schemes.
Further, income tax is not applicable if the annual income is less than Rs.3 lakh. It is charged only if the income is more than Rs 3 lakh until Rs.10 lakh. Irrespective of the income tax slabs, there are deductions under the Income Tax Act. The TDS deduction facility is available. To avail of this facility, individuals have to claim the income tax refund while filing the income tax returns at the end of every month.
After the TDS deduction, the total returns are calculated. The sum of these returns perfectly matches the monthly expenses of the individual as per the example taken. This way, the retirement corpus has been successfully generated. Thus, income generation is fulfilled.
Brief Description Of The Retirement Tools Is Given As Follows
1. Savings Account
Savings account are safe and reliable bank accounts. People park their funds in these accounts to safeguard their money. It is the best option to invest money. But the only shortcoming in this account is low returns. The interest rate earned through this account is 3.5%. But the minimum rate of returns should be at least 6.5% to generate a decent income after retirement.
2. Fixed Deposits
A fixed deposit is a type of investment in which the funds are locked- in for a fixed duration of time. Different types of fixed deposits serve various purposes. They usually have a tenure of a few days to years together. These deposits earn interest at the rate of around 7% to 9%. Investors cannot break these deposits before their maturity. Otherwise, it will be liable for a penalty. These deposits are completely risk-free as they are not dependent on the market conditions. Overall, they are better than savings account as the returns are better and guaranteed.
3. Post Office- Monthly Income Scheme
According to this scheme, the investors have to deposit a huge lump-sum on opening an account. This interest generated on the lump-sum, assures a monthly income to the investors. This scheme is highly beneficial to retired individuals. The interest rate of this scheme starts at 6.6%. The minimum investment required to open this account is Rs.1,000. The maximum limit extends up to Rs.13.5 lakh in case of co-application. The interest earned through this post office scheme is transferred to the savings account in the post office. Therefore, people need to open a savings and an MIS account through the post office to benefit from this scheme’s benefits.
4. Post Office- Senior Citizen Savings Scheme
This is also another post office small saving scheme. It is specifically reserved for the senior citizens of India above 60 years of age. Also, the ones who have taken voluntary retirement at the age of 55 are eligible as well. The SCSS can be availed from banks as well. It has a tenure of 5 years. A minimum investment of Rs.1,000 is required to open this account. The maximum amount that can be invested at a time is Rs.15 lakh in a joint account. The returns for this scheme are at the rate of 7.5% p.a onwards. Deductions under section 80C and 24(b) can also be claimed on the deposits and the interest earned.
5. Mutual Funds (MIP)
These funds with annual dividend payment yield good returns. The returns are generated at a rate of 8% per annum. Further, the DDT of 28.8% makes its yield low.
6. Equity (Balanced Hybrid Funds)
The investment in these funds provided fast capital appreciation. This may not be a priority for the retired individuals, but it is always better to keep a provision.
7. Pradhan Mantri Vaya Vandana Yojana (PMVVY)
This scheme serves a dual purpose for insurance and pension of the senior citizens. It caters to the financial needs of senior citizens who have crossed 60 years. It could be taken from 4th May 2017 to 31st March 2020. But the government has now extended the date till 31st March 2023. It renders the senior citizens’ post-retirement financial needs when there is a fall in the interest rates. The assured rate of interest is 7.4% per annum for the entire tenure of 10 years. The government has introduced new reforms to this scheme in recent years. Now the interest rate earned on this scheme will no longer be fixed. Instead, it will change every year the amount is invested. Therefore, a low-interest rate will be charged on the investments under PMVVY. For the new PMVVY, the modified interest rate cannot exceed 7.75% during any year.
Retirement is the most tranquil time of a person’s life. During this period, every retiree can enjoy his time by fulfilling all his satisfactions. But to do so, they require funds. A good retirement fund should ensure financial freedom to every retired person devoid of stress. The retirement corpus is the only income source that can enable every retiree to lead a financially stable life post-retirement. The corpus should be accumulated before retirement. Post-retirement, these funds should be invested in any investment options that equate to the person’s estimated expenses.
There is a lot of planning involved here. The expenses should be calculated first; then, the corpus should be invested in the most suitable scheme that generates modest returns. Make sure that you don’t invest the entire corpus in a single scheme. Divide the corpus into various fixed income and equity-based schemes. The equity-based schemes are risky, but it is worth it. These schemes will successfully compensate for the inflation that prevails in the market. Expose a small percent of your funds to these schemes as they will ensure capital investment growth. With age comes wisdom. Thus, you must make the best use of it. Choose wisely and make the right investments so that you lead a happy retired life.