Securing your retirement income

If you thought that getting to a good-sized retirement corpus by the time you turned 60 was tough, here's further bad news. Setting up a predictable income stream to see you through retired life is not a cakewalk either.

Given that most of us, whether in the government or in the private sector, no longer receive an inflation-indexed pension from our employer, it is wholly up to us to invest our retirement benefits and the wealth we have created in our working years smartly enough to take care of our living expenses post retirement.

If you are retired and are in the process of selecting investments for your regular income needs, here are five things to keep in mind.

One, in choosing investment options after you retire, you can afford to make far fewer mistakes than you did during your working years. Therefore, prioritise safety of capital over return on capital. Even if safe options such as bank deposits or post office offer lower rates, stick to them and avoid the temptation to go for 'high-return' products where you have no idea where your return is coming from. This means saying no to unregulated 'privately placed' bonds, deposits with unregistered benefit funds and chit funds and land, agriculture and orchard schemes that promise sky-high returns. A simple thumb rule to avoid a high-risk debt investment is to compare the returns it promises with the safest instrument in the economy, which is the 10-year government security. If the return you are being offered is over 2 percentage points higher than the 10-year G-sec, that's a straight indicator of default risk. Today, the 10- year G-sec yields around 7.50 per cent.

Two, stick with products you understand, even if they seem to be staid and boring. Many investors make the mistake of thinking that if a product pitched by their bankers, relationship managers, advisors or wealth managers sounds sophisticated, it must be great. Yet every now and then we come across horror stories of senior citizens getting duped of crores in retirement benefits by renegade bank employees who took crazy risks with their clients' money by diverting them into portfolio management schemes, ULIP or derivative markets.

Three, along with the need to preserve safety of your capital, recognise the need to beat inflation during your retirement years. The interest income you earn from your bank deposit may look more than adequate to fund your monthly needs today. But will it be enough to fund your current lifestyle 15 or 20 years later? Remember, a monthly spend of Rs 50,000 today will equate to a sum of Rs 1.20 lakh 15 years later and Rs 1.60 lakh 20 years later at a 6 per cent annual inflation rate. To earn inflation-beating returns, go for regulated market products like mutual funds.

Four, pay special attention to the liquidity of your investments. It is critical post retirement to park a good part of your net worth in liquid financial investments. If you have investments in land, unproductive property (which isn't yielding rent) or jewellery, liquidate it and park the money in a bank deposit instead. Be conscious of the acts of God that can upset your well-laid plans - a critical illness for you or your dependants, a natural calamity that wipes out your belongings. While property insurance can be good protection against the latter, getting a medical cover may not be easy as you grow older. Explore the option of joining a family-floater policy that your children may have. Or create an emergency fund equal to nine months' expenses.

Finally, pay special attention to post-tax returns while choosing your options, so that your take-home income from every rupee invested is maximised. Having said all this, where exactly should you invest your retirement corpus to get to a healthy post-tax return that will beat inflation?

We suggest segregating your retirement corpus into a 'safe' portion that will take care of your income requirements in the first four to five years immediately after retirement and then into a 'risky' portion that will go into inflation-beating equity investments.

India Post's Senior Citizens Savings Scheme (SCSS) and Pradhan mantra Vaya Vandana Yojana (PMVVY) can be used to invest the 'safe' portion. Both of them currently fetches an annual interest of 7.4 per cent, and you can lock into this interest for the entire term of your deposit, five and 10 years, respectively. Despite their sovereign guarantee which makes them absolutely safe, their return today is much higher than bank fixed deposits.

Once you maximise your investments in this SCSS and PMVVY (capped at Rs 15 lakh each), you can explore short-duration debt funds for your initial income needs too. Instead of using the dividend option in such funds, using a systematic withdrawal plan to meet your remaining income needs (after factoring in the income from SCSS and PMVVY) can be much more beneficial. However, as it is extremely important that your retirement corpus continues to grow with inflation, consider parking the rest of your retirement benefits in aggressive hybrid funds. Phase out your investment in these funds over a two to three-year period. Once you give these funds an initial incubation period of five years, your capital will begin to appreciate. You can then set up an SWP from these funds to supplement your regular income needs. In such funds, one can comfortably withdraw 4 per cent a year and still have a comfortable safety margin.

The low income tax rate of 10 per cent on your gains from these funds after a year ensures that most of the returns you earn flow into your pocket and not the taxman's. To ensure a given monthly expenditure through equity funds, you need much less investment than you would need in bank deposits, for an inflation adjusted income.

Now you're all set to sit back and enjoy your retirement!