At the time of retirement, you get a large sum of money. It can be from your provident fund (PF), superannuation, leave encashment, commutation of pension, or any combination of these.
The biggest question that faces you at that time is: How and where to invest this money? Which investment avenue is safe, yet gives a good return?
This article explains the characteristics of a good retirement fund investment avenue, and suggests some options.
[This article has been inspired by queries from users Roli and T R Nimade]
You work all your life to support your family. You work hard, and progress well in your career.
Finally, the day comes when you can take rest – your retirement! You are free to enjoy life all over again, and can do all the things that you couldn’t do while you were working.
But with all the pleasures, retirement also brings with itself a very important question: Where to invest the money that you got as retirement benefits?
And this is not a trivial question…
The importance of the problem
At the time of retirement, you get an amount that can run into tens of lakhs of rupees. This is because you get the money from many avenues: your provident fund (PF), voluntary provident fund (PF), superannuation, leave encashment, commutation of pension, etc.
You may also get money from the investments that you might have structured in such a way that their maturity coincides with you retirement. These can be Public Provident Fund (PPF), life insurance policies, etc.
Thus, you face a situation where you need to invest a very large amount – an amount that you probably would have never ever invested in one go in your entire life!
Characteristics of expected post-retirement returns
What are the traits of a good investment avenue for parking your retirement corpus?
The problem gets complicated because you would want to invest your retirement benefits in such a way that they last your lifetime.
You need to create an income stream that would not only help you take care of your current expenditures, but also continue to help you take care of day-to-day expenses in the future.
This is especially important for people not getting a pension.
Since you would not have an active stream of income (your salary) supporting you after retirement, you would be relying totally on the income you earn from these investments.
Therefore, the safety of the returns, and the safety of the invested amount (the principal) is extremely important.
Again, since this would be your primary source of income to take care of your daily expenses, you would not want to invest in an instrument that gives a cumulative return.
Rather, you would want to invest in avenues that produce regular (monthly or quarterly) stream of income.
Where to invest
So, we come to the biggest question: Where should you invest your retirement money?
In “Early retirement – Why a fixed deposit (FD) is not a good choice”, we discussed that the best option for retirement planning is to create sources of passive income while you are still working.
But if you have not been able to create such sources of income, we would be largely limited to more traditional avenues of investment – fixed income instruments that are safe, reliable and generate regular income.
Senior Citizens Savings Scheme (SCSS)
The Senior Citizens Savings Scheme (SCSS) ranks very high in the list of instruments to invest your retirement money, as it is a scheme tailored for retirees.
Following are some highlights:
- Absolute safety: It is a government scheme, so it is as safe as it can get!
- Regular cash-flow: The interest payment is made on a quarterly basis.
- Reasonable interest rate: SCSS offers an interest rate of 9% per annum
- High investment limit: You can invest upto Rs. 15 Lakhs in SCSS
I would recommend that you utilize the SCSS as much as possible for investment of your retirement corpus.
To know the details about SCSS, please read “All you wanted to know about Senior Citizen Savings Scheme (SCSS)”.
Fixed Deposit (FD) / Term Deposit
This is another preferred avenue for investment of retirement money. FDs in good banks can provide good, stable returns.
(Check out “Fixed Deposit (FD) – A favourite for generations” for more on FDs)
Also, FDs can be broken or encashed in very little time, and therefore, can be used in contingencies. Therefore, some portion of the retirement money should definitely be kept in FDs.
(To know more about why you should keep some money aside as contingency or emergency fund, please come back to read “Contingency / Emergency fund”)
An amount equal to your six months expenses is usually sufficient as contingency money or emergency fund. This is an amount that should also be able to cover any emergency medical events. Thus, you should at least have an amount equal to your six months expense in bank FDs.
(Planning to retire early? A bank FD might not be the best solution for you! Please read “Early retirement – Why a fixed deposit (FD) is not a good choice” for more)
If you want absolute safety, you can also invest in a Post Office (PO) Time Deposit. It is very similar to an FD, but is kept with the post office. Therefore, it is backed by the government.
(To know more, please read “Post Office Time Deposit Account (Fixed / Term Deposit)”)
Post Office Monthly Income Scheme (PO MIS)
This is another good avenue for parking your retirement funds due to reasons similar to the SCSS:
- Absolute safety: It is a government backed scheme – its safety is guaranteed!
- Regular cash-flow: You receive the interest on a monthly basis.
- Reasonable interest rate: PO MIS offers an interest rate of 8% per annum, plus a 5% bonus on maturity. Thus, the effective yield is 8.9%.
- Investment limit: You can invest upto Rs. 4.5 Lakhs in PO MIS. For joint accounts, the limit is Rs. 9 Lakhs.
(To know more, please read “Post Office Monthly Income Scheme (PO MIS)”)
Other safe avenues – NSC, KVP, Bhavishya Nirman Bonds
There are other government-backed instruments which offer absolute safety. The problem is that these instruments do not give out regular incomes – the interest earned is accumulated and is given out at the time of maturity.
Therefore, these might not be the best option for you to invest your retirement funds.
Please read the following to know more about each of these:
Now, this is one unconventional investment avenue for retirees! But please note that this is an avenue that should not be ignored while investing your retirement corpus.
With life expectancy increasing due to new medical developments, you want your retirement money to last for your entire lifetime.
All the avenues discussed till now barely beat inflation, and would not be able to grow your corpus over time so that it can continue meeting your expenses. The only investment that can grow your money over time is stocks / shares equities.
Traditionally, equities are considered to be too risky for investing your retirement money. But you definitely need a growth kicker in your portfolio, and equity investment is the only viable choice.
I recommend that you put at least 10% of your money in equities – 20% if possible.
This investment should follow the following guidelines:
- Don’t invest directly in stocks, invest through mutual funds (MFs)
- Invest using diversified mutual funds which have a large cap bias – that is, put your money in MFs investing most of their money in established, blue-chip companies
- Don’t invest the money at one go – invest it in stages over time to reduce the risk of wrong timing (Please read “Cost Averaging” for more)
- You can achieve cost averaging in MFs using Systematic Investment Plans (SIPs). Read more about it at “Systematic Investment Plan (SIP) – A rupee a day, keeps worries away” and “More on Systematic Investment Plan (SIP) and Micro SIP”
- When you want encash or redeem these investments, again, do not do it in one go. Do it over time to avoid timing the market. You can do this using a Systematic Withdrawal Plan (SWP) for your MF scheme.
(Please read more about SWPs in “Systematic Withdrawal Plan (SWP) – Avoid timing the market while selling and get regular payouts”)
Happy retirement funds investing!