Without any regular income, the prime objective of retired persons is to protect the retirement corpus and get enough return from it to sustain the post-retirement life.
The low rate of interest on fixed income instruments – like Fixed Deposit (FD) – and high rate of inflation have resulted in devaluation of capital invested in FDs on maturity. The negative real returns on their investments have put fixed income investors – especially retired persons who have limited risk-taking capacity – in a tight spot.
Without any regular income, except for retired government employees having inflation-adjusted pension, the prime objective of retired persons is to protect the retirement corpus and get enough return from it to sustain the post-retirement life.
Although the capital invested in fixed-income instruments remains intact, unless the rate of return matches or beats the rate of inflation, the capital faces devaluation, as the rising prices erode its purchasing power.
Facing devaluation while trying to protect their capital from fluctuations by avoiding market-linked instruments like equities, fixed-income investors are now a worried lot.
Moreover, the tax on interest from fixed-income instruments aggravates the misery of retired persons.
Here are some steps the retired persons may take to optimise post-retirement returns to beat inflation.
Reduce tax outgo
The money saved by reducing the tax outgo will be available in the hands of retired persons for spending.
The ways of saving taxes are –
Under the Old Income Tax Regime, a taxpayer may invest in tax-saving instruments and enjoy deductions from taxable income up to Rs 1.5 lakh in a financial year (FY) u/s 80C of the Income Tax Act. Retired persons may recycle their investments to enjoy the benefit and reduce their tax outgo.
Health is a prime concern of senior citizens. They may reduce the uncertainties of medical expenses by availing health insurance and can save tax up to Rs 50,000 on premium paid in a FY u/s 80D in a financial year.
Tax efficient investments
By shifting some of the investments from taxable fixed-income instruments to low-risk Debt Mutual Fund Schemes, retired persons may reduce the regular tax outflow, as capital gain tax on debt funds are calculated at the time to redemption only.
By holding the funds for 3 years or more, investors may avail the indexation benefit to minimise tax outgo further. As dividends are now taxable in the hands of the investors, it’s better to avail Systematic Withdrawal Plan (SWP) to save tax.
Invest for capital appreciation
It’s said the biggest risk is to take no risks. Instead of sitting idle and watching their capital invested in fixed-income instruments facing devaluation, it’s better for retired persons to take some calculated risks and reverse the tide.
Invest in equities
To protect their capital from devaluation, retired persons may invest a part of their capital – which may be spared for long-term of at least five years – in equity-oriented mutual funds with lower risk like balanced fund or multi/flexi-cap fund. The capital appreciation through long-term investments in equities will help in countering the erosion in capital invested in fixed-income instruments.