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Retirement money: How to invest, where to invest

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?

Lasting returns

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.

Safe returns

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.

Regular returns

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:

Stocks

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:

(Please read more about SWPs in “Systematic Withdrawal Plan (SWP) – Avoid timing the market while selling and get regular payouts”)

Happy retirement funds investing!

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Comments

  1. c.l.wangneo says:

    Dear sir,If my terminal money at the time of my retirement at age 60 is 15–20 lakhs how should I invest it so as to get a steady income of 7000 to 10000 rs per month or whatever max. I can get.I am sure this would mean investing in senior citizens savings schemes. What is this scheme.Please instruct by return mail on my e-mail address regarding all possible ways of earning the mentioned monthly income.
    Regards, wangneo,Jammu,j&k.

  2. Hi,

    You would be able to earn the best possible return on your retirement income if you follow the points mentioned in this article.

    Please read All you wanted to know about Senior Citizen Savings Scheme (SCSS) to know all the details about the SCSS.

  3. Anonymous says:

    Hi Pratap,

    Yes, you can get income tax benefit. But it is a toipc big enough for a separate article.

    I would write about it soon – thanks for suggesting a good topic!

    (Update: The article is now published. Please check out “Have a disabled dependent? Save income tax using section 80DD“)

  4. m k pratap says:

    Dear Sir,

    My Mother is dependent on me and she is disabled, can I get Income tax rebate.

  5. Hi,

    My mother has just retired and I was searching for some good investment options for the post retirement benefits received by her. I found your article very helpful with complete details. Would request you to help me with the following.

    1) If the amt is approx 20 lacs can you tell me how much can be invested in FD, Post office scheme, SSSC and mutual fund.

    2) Which mutual fund according to you gives steady returns. Please note her risk profile is moderate.

    3) Are there any other options apart from the above where the amount can be invested.

    4) Moreover do you think that Fd’s should be kept in different banks or just one bank… considering the present scenario of banks.

    Your reply would be of great help.

    Regards
    Priya

  6. Anonymous says:

    Hi Priya,

    How to invest:

    The Senior Citizen’s Savings Scheme (SCSS) remains the best option for investing retirement money. It is the safest (it is backed by the government), and gives good returns. Also, the interest is paid quarterly, so it can take care of monthly expenses as well.

    For some time, when bank FDs were giving high returns (in the range of 11%), bank FDs became more attractive . But now, SCSS is a clear winner. Your mother can invest the maximum allowed amount of Rs 15 Lakhs in it.

    For the remaining Rs. 5 Lakhs, there are two options.

    Option 1 is to invest the entire Rs. 5 Lakhs in bank FDs, with a monthly interest payment option. Use this interest to invest in systematic investment plan of 2 good diversified equity MF schemes. This way, you would be investing in stocks while still preserving the capital.

    The investment in stocks would give good return over time, and would act as a hedge against inflation. The investment would also be gradual, so that you can benefit from cost averaging.

    At the same time, the capital would be preserved, which is important for a retired person. This money would also act as an emergency fund in case of some unforeseen event. (Remember, the amount invested in SCSS is locked-in and is not very liquid).

    If you are able to keep the FD at say 8.5%, the Rs. 5 Lakhs would yield Rs. 42,500 per year = Rs. 3,542 per month. Even if you consider income tax at 30%, you would get Rs. 2,479 every month. This amount – either the full amount or a part of it, depending on your mother’s cash requirements – can be invested in the SIP of good diversified equity MF schemes.

    Option 2 is the more conventional option, where you can invest Rs. 2-3 Lakhs in bank FDs (this would also act as an emergency fund), and the remaining in diversified equity MFs. However, I don’t advise putting a large sum in MFs in one go.

    Type of MF:

    A diversified equity mutual fund would be the best option. Please select a fund that has a good long term (5 years) track record.

    FDs in multiple banks:

    I personally believe that all banks in India are quite strong, even after the crisis. But if you are not comfortable, you can have the FD in a PSU bank or can diversify between 2 banks.

  7. Dear Raag,

    Thanx a ton!!!

    That has cleared all my queries.

    I will do some research on Equity Based Mutual funds as suggested by you.

    I must say, for a layman like me and with so many people giving so many advises your website and logic behind the investments is very easy to understand and does not leave even a ray of suspicion in taking the correct decision.

    Thanks once again

    Regards
    Priya

  8. Anonymous says:

    Hi Priya,

    I am very happy that I could be of help… My goal is to explain things in simple terms, and I am glad that you think I am succeding!

  9. manoj shah says:

    i am going to retire shortly. i am likelt to get PF, PPF, Graduity, leave benifits amount exprly RS.–50Lacs.

    how to invest for max recurring income??

    Advise pl.

  10. Anonymous says:

    Hello Manoj,

    This article is specifically written for people who are retiring – it explains how the funds should be invested, keeping in mind safety and timely returns.

    Please follow the steps mentioned in this article, and you should be earning a good return for a long time.

  11. LT COL ARVIND VARMA says:

    Dear Mr Raghava Dutt,
    I have been desperately trying to register on your site without sucess .PLEASE HELP.
    regards
    Lt Col Arvind Varma

  12. Anonymous says:

    Dear Sir,

    I am really sorry for the inconvenience you are facing.

    However, I am seeing that many people have registered as new members. So, it looks like there isn’t any technical problem.

    Can you please describe the problem you are facing, so that I can solve it?

    Thanks, and apologies once again.

  13. Read your article on investment for retirees. Found it extremely useful. Would you suggest 8% taxable RBI bonds also as an option, because the interest on SCSS & POMIS is also taxable.
    Regards
    DS Khera

  14. Good afternoon Sir,

    I am an NRI aged 55 and wished to know how best to invest 20 Lacs in India. Should I opt for Mutal Funds or FD. Ideally I am looking for a Plan that will give me x amount of money for my monthly expenditure when I return to India after 5 years.

    Many thanks

  15. Dear Sir,

    Thank for your article. It is very insightful and will really help me in making a prudent investment decision when I retire this August.

    I have another question for you. I would appreciate if you would be kind enough to answer it:

    I have an investment property which I purchased in 1995. The cost of the property has gone up significantly and now since I am retiring in a few months, I would like to reap the benefits of the appreciation in price. The question I have is: Let’s assume that I sell the property for 20 lacs and but another investment property for half that amount. How tax will I have to pay on the remaining 10 lacs?

  16. PANKAJ .PATEL says:

    Dear sir
    I am mechanical engineer and doing job in the gulf since last 04 yrs and save money around 30 lacs , out of 30 – 15 lacs i want to invest money to secure future so i do not dependant on anybody …like any pension scheme ( regular income )
    sir , kindly suggest me .

    thanks with regards

    PANKAJ

  17. Ramamurthy says:

    You have not talked about two other investment oppurtunities available for senior citizens perhaps because they are not very popular.
    No 1 :-Investment in Jeevan Akshay 6 scheme of LIC.You will get monthly pension by paying a onetime premium.There are different options. eg under one option for an investment of Rs 1 Lac a person whose age is 75 gets a life time pension of Rs 1128 per month((13.54%).Pl.do a google search on Jeevan Akshay 6 for full details.
    No 2:- Reverse mortgage
    Under this scheme the Senior citizen can stay in his own residence for life and get a monthly income by mortgaging his residence.Eg I am told Central Bank of Indiahave a scheme under which on a propert worth Rs 2 Crores they pay monthly
    a sum Rs 85000/=

  18. My wife is a senior lecturer in a college affiliated to Delhi University. She is due for retirement in a month’s time. Please advise how best she can plan her retirement benefits so that she can earn maximum return on her investments and also save on the Income Tax.

  19. For latest news you have to pay a quick visit web and
    on world-wide-web I found this site as a finest site for most
    up-to-date updates.

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