Government employees who joined on or before December 31, 2003 needn’t worry about their retired life, as they are already getting or will get assured inflation-adjusted pension life long. But for those working in private sectors, retirement planning is crucial for survival after their regular income post retirement gets stopped.
As the length of the post-retirement life is almost equal to the earning life of a person, it’s ideal for a person to start retirement planning from the beginning of his/her service life to ensure accumulation of an appropriate retirement corpus without taking much stress and risks.
So, the earlier you plan and start investing for retirement, the better it is. But in case you have not started investing for retirement yet, it’s better not to delay it anymore.
At the current price level, a person needs at least Rs 50,000 per month to maintain his/her family. However, in case you are going to retire after some years, the monthly requirement will go up with each passing year.
However, despite the increase in requirement, the more time you have before retirement, the easier it will be to accumulate a retirement corpus for you.
Now, let’s see how much corpus you would need to get Rs 50,000 per month currently under the different investment options:
Fixed Deposit (FD)
For senior citizens, the FD rate currently is about 7.5 per cent per year. So, to get Rs 50,000 per month or about Rs 6 lakh per year, you need to invest about Rs 80 lakh.
Senior Citizen Savings Scheme (SCSS) is a safer option having annual interest rates of 7.4 per cent, but you can invest only up to Rs 15 lakh in each scheme.
Taxation: Interest on FD is taxable beyond the exemption limit of Rs 50,000 for senior citizens u/s 80TTB of the Income Tax Act. Tax will be deducted at source (TDS), unless Form 15H is submitted.
Risks/Drawbacks: As the FD rates continue to vary, you will face reinvestment risks as the rate may change when you renew your FD at the end of the tenure.
The interest and the principal invested will not grow with increase in price level, resulting in loss of purchasing power due to inflation.
IRDAI regulated insurance companies offer regular life-long annuity plans that may be used as pension plans. There are different annuity rates offered under various annuity options.
Under the Annuity Option A (annuity for life), where the annuitant will get life-long pension without return of the amount invested after his/her demise, of LIC of India’s immediate annuity plan Jeevan Akshay, according to the current annuity rate, a 60-year old person need to invest Rs 74,88,766 to get a monthly pension of Rs 51,342.
Under the Option F (annuity for life with return of purchase price), however, a 60-year old investor needs to invest Rs 1,05,26,315 to get a monthly pension of Rs 51,974.
LIC of India also disburses the Prime Minister Vaya Vandana Yojana (PMVVY) scheme that is currently offering an annual rate of interest of 7.66 per cent for 10 years, with an investment cap of Rs 15 lakh.
Taxation: Annuity received is taxable in the hand of annuitants. However, there will be no TDS and the annuitants need to declare the annuity received under the head Income from Other Sources, while filing their Income Tax Return (ITR).
Risks/Drawbacks: As the pensions are for life long, there are no reinvestment risks involved. However, with 1.8 per cent GST on premium, the actual investment amount will become higher.
The annuity and the sum insured invested will not grow with increase in price level, resulting in loss of purchasing power due to inflation.
Mutual Fund (MF)
There are various types of MF schemes available under both equity and debt segments. The rate of return or the Compound Annual Growth Rates (CAGR) are low for debt-oriented schemes compared to those of equity-oriented MF schemes. On the other hand, fluctuations in capital invested would be lower for debt schemes and higher for equity schemes.
So, to balance the risk-return profile, it would be better to opt for hybrid or balanced schemes containing both debt and equity in the portfolios of the schemes. Such schemes are called Balanced Advantage Fund (BAF) or Dynamic Asset Allocation Fund (DAAF), which generally invest minimum 65 per cent in equities and remaining in debt instruments.
As the 3-year average CAGR of most funds in these categories are around 12 per cent, you may opt for Systematic Withdrawal Plan (SWP) of 8 per cent per annum to ensure growth of the corpus along with regular return.
So, to get Rs 50,000 per month or Rs 6 lakh per year, you need to invest Rs 75 lakh in a good BAF or DAAF scheme.
The growth in corpus will not only help the money invested keep its purchasing power intact, but would also allow you to increase the withdrawal limit to cope up with rising prices.
Taxation: The gains on units redeemed within 12 months from the date of purchase will be taxed at a flat rate of 15 per cent, while the gains exceeding Rs 1 lakh on redemption of the units older than 12 months in a financial year will be taxed at 10 per cent.
Risks/Drawbacks: The investments are subject to market risks. Higher number of units will be redeemed when the markets and NAV are low compared to redemption made in a high market at a higher NAV.
Past performances are also no indications of the future results.