Over the last few decades average income and savings have increased significantly in India. Many of today’s senior citizens are financially independent and are able to maintain their pre-retirement lifestyles, unlike their parents who were financially dependent on their children’s earnings. However, while average retirement nest eggs of senior citizens today are substantially more than what it was thirty or forty years back even after adjusting for cost of living inflation, today senior citizens are faced with newer challenges. Average longevity has increased thanks to much better healthcare facilities available in our country. While this is fantastic news for our country, longer lifespan means that your retirement nest egg (if you are wondering what nest egg is; it is simply a substantial amount of money saved for a specific purpose, in this case to meet living expenses after retirement) has to last that much longer. Associated with increased longevity is the higher cost of health care. The longer we live, the more we have to spend on medical bills. While quality of healthcare has improved remarkably, the cost of healthcare has also caused financial distress to many families. Before we get into the topic of our today’s blog post, the best investment options for senior citizens, it is very important to understand that health insurance or Mediclaim is a critical financial requirement for all senior citizens. Lack of adequate health insurance poses serious financial risks to all seniors and therefore before seniors plan their investment, they should ensure that they have adequate health insurance (please see our post, Best Health Insurance Plans for Parents who are Senior Citizens). Let us now come to investments. For senior citizens, there are five main investment considerations:-
Regular cash-flows:Senior citizens depend on income from their investments for their regular expenses. Therefore, they have to ensure regular cash flows from their investments. Further, they need a high degree of predictability as far as their regular cash flows are concerned. Volatility of cash flows can cause problems in meeting the monthly expenses.
Protection of capital:For senior citizens capital protection is extremely important. If you are dependent on retirement corpus, then any erosion in capital will result in lower income for you. Therefore, it is prudent to invest the retirement corpus with high degree of safety.
Liquidity of investments:When you are working your income from profession or business provides regular cash flows. However, when you are retired you have to be dependent on your investments. If your investments do not have sufficient liquidity, then you may be vulnerable to variety of financial risks. If your investment is locked in for 5 years and you need the money today desperately, your investment is useless, no matter how good the returns are.
Reducing income tax:Taxes are inevitable if your income is above a certain level. However, the government offers several tax benefits and rebates to senior citizens. Therefore, senior citizens should pay a lot of importance to tax when planning their investment. At the end of the day, it is the post tax returns that matters as far as cash-flows are concerned.
Keeping up with inflation:This is a very important consideration for senior citizens. Inflation like tax is a fact of life and cannot be wished away. As a senior citizen your capital is constant or declining and therefore, if you make invest in assured return schemes your income will also be constant or declining. If your income is constant or declining and your expenses increase with inflation, at some of point of time, you will run out of money. With increased longevity, inflation is a major concern for senior citizens. The longer we live, the more vulnerable we are to inflation.
In this article we will discuss investment options for senior citizens keeping in these key investment considerations.
Senior Citizens Savings Scheme (SCSS):This is one of best risk free investment schemes for Senior Citizen. The minimum investment limit in this scheme is
र1,000 and the maximum limit is र15 lacs. This investment qualifies for deduction under Section 80C of the IT Act. From a liquidity perspective, the scheme has a period of 5 years and carries an interest rate of 9%, one the highest applicable rates for similar instruments. A penalty of 1.5% per cent is levied on the amount deposited, in case the deposit is withdrawn before 2 years and 1% if the amount is withdrawn after 2 years, but before the expiry of the term of the investment. The interest income of this scheme is not tax-free for senior citizens. While the maximum limit of र15 lacs is constraining factor, seniors who have their immediate liquidity concerns addressed through other investments, should try to maximise investments under this scheme since this offers attractive returns and capital safety.
Post Office Monthly Income Scheme (POMIS):This has been a popular investment option with senior citizens for many years. POMIS offers guaranteed 8.5% annualized returns to investors. The maturity period of these schemes is five years. Premature withdrawals are subject to a deduction of 2% of the amount invested if such a withdrawal happens within three years of investment. After three years, the amount of deduction is 1% of the amount invested. The maximum investment limit in POMIS is only
र4.5 lacs in one account in POMIS or र9 lacs if the investor is investing in a joint account. There is no Section 80C benefit for POMIS investment. The interest income from POMIS is taxed as per the income tax slab of the investor. With rising cost of living, seniors cannot rely on solely POMIS for their income needs. Nevertheless POMIS remains a good risk free investment option for senior citizens.
Bank and Company Fixed Deposits:Bank Fixed Deposits have always been seen as offering safety and convenience. Most banks offer senior citizens a special rate on fixed deposits, which tend to be 0.5% higher than normal fixed deposit rates. Currently the bank fixed deposit interest rates for senior citizens are in the range of 8 to 8.5%. However, the interest rates are likely to go down from April 1, 2016 as Reserve Bank India (RBI) seeks better transmission of policy rate reductions to borrowers. Investors should enquire about interest rates from multiple banks because it differs from bank to bank and can make a significant difference to the final return to the investor. Interest earned by FDs is fully taxable at the applicable slab rate and tax is deducted at source. Fixed deposit issues from various companies offer higher interest rates than bank fixed deposits. However, such issues are limited and investors should note that they carry credit risk. Investors should check the credit rating of the companies before investing in the company FDs. Fixed deposits from companies rated AA and above are pretty safe and carry low default risk. Investors should be on the look for such issues, as these are good investment options.
Senior Citizens Pension Plans (Varistha Pension Bima Yojana):This scheme for senior citizens is run by LIC. The interest rate offered by Varistha Pension Bima Yojana scheme is the highest among all the annuity plans offered by different life insurance companies. It is an immediate annuity plan offering an interest rate of 9.38% to senior citizens, whereas the best plans from the private life insurance companies offer only about 7.3 – 7.6%. LIC is offering more as the scheme is sponsored by the government. Compared to Senior Citizens Savings Scheme and Post Office Monthly Income Scheme, the Varistha Pension Bima Yojana offers higher interest rate. However, there is a disadvantage in investing in Varistha Pension Bima Yojana compared to Senior Citizen Investment Scheme and Post Office Monthly deposit. The liquidity of Varistha Pension Bima Yojana is very low compared to Senior Citizen Savings Scheme and Post Office Monthly MIS. Whereas the maturities of Senior Citizens Savings Scheme and Post Office Monthly Income Scheme are 5 years, LIC allows your parents to surrender Varistha Pension Bima Yojana only after 15 years. Your parents can also surrender the policy before 15 years, if they need money for treatment of critical illnesses of self or spouse by paying a 2% surrender fee. A loan, of not more than 75% of the premium, is also offered after completion of three policy years of the LIC Varistha Pension Bima Yojana. The lack of liquidity is a major concern for Varistha Pension Bima Yojana, but if you can take care of your parent’s liquidity needs like medical and other expenses, as and when they arise, this might be a good scheme for them.
Other Immediate annuity products:There are other immediate annuity products which offer a variety of options which can give the insurance buyer to choose a plan which is suitable for their needs. For example, senior citizens can buy LIC Jeevan Akshay VI, an immediate annuity plan, with the option to receive annuity payments at the rate of 9.35% for life. But if the investor dies, his or her spouse will stop receiving annuity payments. There is another option, where the investor and his spouse receive annuity payments at a certain rate for a number of years, whether the investor is alive or not. There is another option, where in addition to annuity payments during the lifetime of the insurance buyer, LIC will also pay the purchase price of the policy on the death of the insurance buyer. There are a variety of other options, but remember there is no free lunch. The more flexibility you have lower is the annuity interest rate. You can consult with your financial advisor regarding different annuity products in the market to see, if they are suitable for you.
Debt Mutual Fund Funds:Debt mutual funds offer a variety of investment options for senior citizens’ investment needs. At the very outset, we should say that mutual funds are subject to market risks and do not give assured returns. But if senior citizens develop a good understanding of risks, they can identify appropriate debt fund schemes that are suitable for their investment needs across the entire range of investment tenures and interest rate scenarios. Senior citizens can consider two types of debt funds. Short term debt funds are suitable for investors with low risk tolerance, looking for stable returns. Short term bond funds invest in Commercial Papers (CP), Certificate of Deposits (CD) and short maturity bonds. The average maturities of the securities in the portfolio of short term bond funds are in the range of 2 – 3 years. The fund managers employ a predominantly accrual (hold to maturity) strategy for these funds. In the current interest rate scenarios these funds are giving around 9% returns (please see our article, Top 5 short term debt mutual funds in 2015). If investors have moderate risk tolerance level and a long investment horizon, then they can invest in income funds. Income funds invest in a variety of fixed income securities such as bonds, debentures and government securities, across different maturity profiles. For example they can invest in 2 to 3 year corporate non convertible debenture and at the same time invest in a 20 year Government bond. Their investment strategy is a mix of both hold to maturity (accrual income) and duration calls. While the long portfolio duration makes them sensitive to interest rates, income funds can earn good returns in different interest rate scenarios from their strategy mix. Top income funds have given double digit compounded annual returns over the last 3 years (please see our article, Top 6 long term income funds in 2015).
Mutual Fund Monthly Income Plans:While capital safety is an important consideration when you are retired, as discussed earlier, with increasing life spans and high inflation, you cannot totally ignore equities. Equity as an asset class, while riskier than fixed income, has beaten in inflation in the long term. Debt oriented hybrid mutual funds are excellent investment options for investors who want to earn higher returns on their investment with limited risks over a long investment horizon. Mutual Fund Monthly Income Plans, a type of debt oriented hybrid mutual funds are good investment options for senior citizens who want to get regular income along with capital appreciation. These plans invest 20 – 30% of their portfolio in equities to give a kicker to returns and at the same time earn stable income by investing 70 – 80% of their portfolio in fixed income securities. Mutual fund MIPs offer better liquidity than some other investment options discussed above. Mutual funds charge 1% exit load for redemption of units within one year of allotment. After one year there is no exit load. Returns of mutual fund MIPs are more tax efficient compared to other investment options. Even though MIPs are treated as debt funds from a tax perspective, the dividend distribution tax paid by the mutual fund is lower than the tax rate of the investor in the highest tax bracket. Savvy investors can save taxes further by opting for systematic withdrawal plan (SWP) instead of dividends (. SWP withdrawals are assessed for capital gains tax. Long term capital gains (more than three years in case of non equity funds) are taxed at 20% with indexation. Top performing MIPs have given more than 10% compounded annual returns over a 10 year investment period. You can look up top performing debt oriented hybrid funds by going to our research section, Top Performing Mutual Funds - Hybrid Debt Oriented Funds. The downturn in global and domestic equity markets notwithstanding, the outlook on the Indian economy is positive relative to other emerging markets. In fact, most experts believe that we are in a long term structural growth market and that the current downturn is a good opportunity to increase allocations to equity. Having said that, investors should also understand mutual funds are subject to market risks and that past performance is not a guarantee of future performance. Therefore they should ensure that mutual fund investments are consistent with their risk profiles.
Liquid funds:Senior citizens should consider liquid funds as an alternative to savings bank. While having an emergency fund parked in savings bank is essential from a financial planning perspective, if you can wait for a day to withdraw the funds, liquid funds are an excellent alternative to your savings bank account. While savings bank interest is usually around 4%, liquid funds are currently providing returns in the region of around 8%. Every bit of extra income is very useful for senior citizens. While liquid funds are subject to market risks, the nature underlying instruments in a liquid fund ensures a very high degree of safety. Withdrawals from liquid funds are processed within 24 hours on business days. You can read more about liquid funds in our article. When planning your investment in liquid funds, you should note that redemption requests are not processed during public holidays or weekends. Therefore, you should have enough funds in your savings bank account to meet exigencies over weekends and public holidays. Having said that, most of us keep funds in our savings bank that we will not need in the next few weeks or even months. Liquid funds are an excellent destination to park those funds. You can read about top liquid funds for investment in our article, Top Liquid Mutual Funds: Better options than savings bank for parking your surplus cash.
In this article, we have discussed various investment options for senior citizens. A one size fits all investment solution does not work, because the financial situation and investment objectives of every individual investor is different. Senior citizens should consult with their financial advisors to discuss the best investment options that are suited to their specific needs.