Whenever one talks about retirement planning, the immediate thought is that the person whose retirement is being planned still has some years to go before retiring. But this might not always be the case. It is not always that the person has time on their side, or can use the various strategies for planning and conducting their retirement in a better manner.

There is a segment for which this kind of advice might have come a bit too late - the retirees.

If you are already retired, what you need is a post retirement solution. Let’s begin by discussing the unique factors associated with building a portfolio for the post retirement individual.

3 Factors to Keep in Mind

Firstly, the importance of capital preservation gets magnified manifold. The retirement corpus at the investor’s disposal has to provide for him henceforth. Hence high-risk investment avenues like equities or equity funds should either be excluded or be allocated a very modest portion of the portfolio.

This also means you must keep inflation in mind, and be sure to try and match inflation at all times. If an investment avenue does not match inflation, it means the real value, the purchasing power of your wealth, is eroding. As we are currently in a high interest rate scenario, there are various options available that will offer you safe, fixed returns and still match inflation - such as high rated corporate FDs, strong FMPs where you can use the benefit of indexation, and so on.

Liquidity assumes significant importance. With no alternate options like salary or business income to fall back upon, the portfolio should be structured in such a manner that it grants a high degree of liquidity to the investor.

So what are the available options?

Let us discuss the various investment options available to retirees and find out how they measure up.

 

• Senior Citizens Savings Scheme (SCSS)
  
  As the name suggests, the scheme is a dedicated investment option for senior citizens i.e. individuals above 60 years of age; those above 55 years are also permitted to invest subject to fulfillment of certain conditions. The minimum investment amount is Rs. 1,000 while the upper limit has been capped at Rs. 1,500,000. Since this is a scheme especially for retirees, it fares well on the liquidity front. The scheme runs over a 5-Yr period and offers a return of 9.00% p.a. which is paid out on a quarterly basis making it the most attractive investment option in the peer group. Remember that this 9% is taxable in your hands.
  
  Premature encashment is permitted after completion of 1 year from the deposit date. If the investment is liquidated before expiry of 2 years, an amount equal to 1.50% of the deposit balance amount is deducted. A termination after completion of 2 years attracts a penalty of 1.00% of the balance amount.
   
• Post Office Monthly Income Scheme (POMIS)
  
  Another popular investment avenue for investors seeking regular income, POMIS is operated from post offices and offers assured monthly income. The minimum investment amount is Rs. 1,500; the upper limits have been set as Rs. 4,50,000 and Rs. 9,00,000 for single and joint accounts respectively. The investment tenure for POMIS is 6 years and investments earn a return of 8.00% p.a. (payable monthly); also a 5.00% bonus is paid on maturity. The norms for premature withdrawal are rather stringent. Premature withdrawals are permitted after 1 year; however 2.00% of the deposit amount will be deducted if the account is closed on or before expiry of 3 years from the opening of such account. Premature closure of account after 3 years from the opening of such account will attract a deduction of 1.00% of the deposit amount.
   
• Post Office Time Deposits (POTD)
  
  POTD is for all intents and purposes, the FD variant from the small savings segment. While the minimum investment amount is a mere Rs. 200 (and in multiples of Rs. 200 thereafter), there is no upper limit on investments.
  
  POTD offers investors a number of options in terms of investment tenures ranging from 1 year to 5 years. Similarly, the returns range from 6.25% to 7.50% on a quarterly compounding basis. Interest payments are made annually. As on December 01st, 2011, post office savings products rates of interest will be announced each year on April 01^st. Today the proposed rate is 8.30%, but remember that we are currently at the peak of the interest rate cycle and hence when interest rates fall, post office savings rates will fall too, just perhaps not as much. Also remember, this too is taxable in your hands.
  
  Premature withdrawals can be made after the completion of 6 months and before 1 year; however investors have to bear a loss of interest. Premature withdrawal after 1 year will attract a penalty of 2.00% on the interest fixed at the time of opening the account.
   
• Fixed Deposits
  
  Retirees can also consider making investments in fixed deposits schemes are offered by Banks, NBFC’s and corporates. The first fact of course here is that there is no liquidity in an FD. PersonalFN’s preference is for fixed deposits with a ‘AAA’ rating indicating a high degree of safety. Interest payouts are made on quarterly, semi-annual, annual or cumulative basis (based on the offering) throughout the tenure of investment. Also fixed deposits are known to offer a higher interest rate (generally 0.50% more than the regular rate) to senior citizens, thereby making them attractive investment options.
  
  It is important to note that all fixed deposits do not offer liquidity or the option to withdraw prematurely. Also liquidating the investment before completion of its stipulated tenure entails loss of interest and in some cases a penalty i.e. you would lose out on some interest that you would have otherwise earned for the same actual invested time period.
  
  So far the investment options discussed were of the assured return variety. Though they have assured returns, some of them tend to fall behind when it comes to giving you a rate of return higher than inflation.
  
  The last option we are going to talk about involves some risk, and is not one that guarantees a fixed return. For these reasons, you should consider them only if you are willing to take on the risk to earn commensurately higher potential returns.
   
• Monthly Income Plans (MIPs)



 
• Monthly Income Plans typically invest 15%-25% of their corpus in equities and the balance in debt instruments. Investors can choose between the monthly, quarterly, half-yearly and annual dividend payout options or the growth / cumulative option. However it should be understood that on account of their market-linked nature, MIPs expose the investor to higher levels of risk vis-à-vis peers like POMIS and POTD. Also the returns are not assured; neither is there certainty in terms of capital preservation.
  
  On a positive note, MIPs are equipped to deliver superior returns as compared to its assured return peers. Also it scores on the liquidity front as there is no fixed investment tenure (an exit load may be charged if investments are liquidated within 6 months from the investment date). Finally, dividends received from MIPs are tax-free in the investor’s hands, although a dividend distribution tax of over 14% is indirectly borne by the investor which is held back by the fund house before distribution of dividend.



 

Conclusion

The decision to invest in any of the aforementioned schemes and the allocation to each scheme should be a factor of the investor’s risk profile. Retirees who are not averse to taking on a higher degree of risk can make more allocation to MIPs or even consider adding diversified equity funds to their portfolios. Conversely, those who attach greater importance to capital preservation should invest predominantly in assured return instruments. Likewise, the retiree’s requirements will also play an important role in the portfolio creation. For example, a retiree who is well off and supported by his family may not need to fend for himself.

Instead he might be keen on investing for his grandchildren and other family members. In such a scenario, the investment tenure goes up, as does the opportunity to take on higher risk; equity oriented funds then emerge as a feasible option.

Finally, don’t undermine the importance of a qualified and experienced investment advisor. Powered by his expert advice and prompt service, a good financial planner can ensure that your post retirement investments become a hassle-free affair.

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Comments
pmajgn@gmail.com Feb 04, 2012 Dear Sir, In the POMIS section, u mentioned the scheme with tenure of 6 years, but few changes has been made in this scheme with effect from 01.Dec.2011. The tenure has been reduced to 5 year & the rate of Interest has been increased to 8.2%. Also No bonus will be paid to the schemes taken after 01.Dec.2011. Kindly check & update the article accordingly. Regards, Aparna Nema.
randbthill@chartermi.net Feb 25, 2012 Solid work David. For anyone who doesn't know, David is a good and honest guy. If you're anything like me, then you care about that.All the best.
nmrsridhar@apf.co.id Feb 29, 2012 reg POMIS -- I thought the 5% terminal bonus has been discontinued. pls clarify.
smahesh75@gmail.com Jan 27, 2012 Dear Author, This is an outdated article. The small savings rates of return have been changed recently and your article has not reflected those changes. Thanks and Regards, Mahesh
sroy199@gmail.com Jan 27, 2012 Bonus of 5% in POMIS has been discontinued and interest rate offered is now 8.2%. Adequate information must be gathered before posting such article!!!!

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