A desirable regular income which can meet our living cost comfortably is what we all wish to have when we retire.To achieve this objective we have to prepare well ahead.We need to allocate savings for retirement early in life and follow a wise asset allocation approach. However, the biggest worry comes when you have to generate income post retirement. With continuous changes in financial products there is a lot of confusion for identifying the right mix. The situation is difficult for individuals working in private sector as they do not have any defined pension benefits to rely upon for their retirement needs. Even new employees in government jobs do not have defined benefits scheme now..Thus, one has to allocate surplus wisely to meet the need of a regular income.
One of the larger issue post retirement is that there cannot be dependence on one venue. There is no such product which can meet your complete retirement needs by investing your entire surplus in it. One has to evaluate mix of products to ensure there is a growth in the corpus and the required income is generated. Although new products will evolve going forward and existing may be made more appealing here are various options available to retirees today and how do they stand with respect to meeting this requirement-
- Fixed Deposits – No doubt it’s the most trusted product due to the perceived safety of the bank. In recent years high interest rates have given more weightage to this avenue. But the taxation of interest is one of the deterrents which reduces the net earnings. The income as interest is surely assured for the term but is not free of inflation risk i.e. it does not compound with inflation and reinvestment risk is always present. Most fds have a maximum 10 year term after which you have to find another option as it may not yield the same rate post maturity. So this product may address your need only if you are from a lower tax bracket.
- SCSS– Senior Citizen Savings Scheme is a regular interest payout scheme with an objective to provide regular income to retirees. It gives you a quarterly interest pay out but there is limit for investment and the term is maximum 6 years. But here too the interest is taxable which is again a major hindrance for higher tax payers. Moreover the interest is no more fixed now and so post maturity you are not sure what rate will be offered. A lower rate will deter you from investing in the product. But still it is one of the considerable product.
- Post Office MIS – This was the flagship product among retirees for earning a regular income. With 8% assured return the option of monthly payout was the most appealing. But it has loosened its sheen since interest rates are made market linked. It is also a 6 year scheme thus posing a reinvestment risk when the rates may be lower next time you invest. It thus does not complete the income requirement for a very long period.
- Immediate Annuity: They are the immediate income generator. With option for lifetime income they very well fit in the life time regular income criteria. But their returns are not linked to inflation and are lower when you opt for it early. They may fit as one of the product for generating monthly income but cannot surely be rely upon. Annuity market has to still see lot of changes to make such products beneficial for the retirees.
- Reverse Mortgage – It was launched initially as a banking product but saw the least interest due to many drawbacks. Later the insurance companies pitched in and lifelong annuity was introduced in reverse mortgage. Still the taxability was an issue and so government made it more appealing when the annuity in Reverse Mortgage was made tax free. The product can be a good income generator for some retirees but has to deal with some emotional aspect of a house ownership. For more information in terms of buying a house using a mortgage loans in Canada, well, you can immediately contact some professional mortgage brokers in Canada.
- Mutual Funds – Arguably the most advisable option today. When looking at generating regular income and growth of the corpus simultaneously then mutual funds are the viable option. Strategies like Systematic Withdrawal Plan by investing the corpus in debt funds work well for achieving the objective. What still deters retirees from investing here is the non-assurance of returns. But coupled with other options this investment can meet requirement need to a great extent.
- Bonds – Not many retiree look at this option since it comes in pieces. Last year tax free bonds were issued and it ran with a huge success. The high interest rate scenario gave a favorable option of receiving a regular income for 15-20 years. This would have benefited many retirees and the product is still available at stock exchange but one has to work on the yield. Apart from this there are long term bonds issued by good companies such as Tata, Shriram etc. which may be added in a retirement portfolio for generating regular income.
- NPS – New pension scheme is in existence from only few years and is a deferred pension scheme. It is running with its own problems but expected to resolve the issues . What income it may offer is yet to be seen.
There may be other options which I may have missed out but more or less these are what one have for generating retirement income. If we take them in isolation then meeting a post retirement income need of almost 25-30 years will be difficult. One will have to find a mix to bring the required income to their family. More than that these products have to be reviewed regularly to ensure they are meeting the objective. Sometimes returns will not be criteria when falling short but a balance has to be achieved finding out good alternatives. It’s here that advice of an expert may be required to search the right combination. A fee only planner suits the requirement as he/she is not inclined to any interest in any of the financial product.
Are you looking for retirement income? What options you have evaluated?
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