Can Senior Citizens Solely Depend On Fixed Income Instruments for their Retirement Needs?

With policy rates being reduced by the Reserve Bank of India (RBI) to address growth concerns, the most adversely affected individual investors have been retirees, who depend on mostly fixed-income investments to manage their monthly expenses.

What increases the stress on their savings and income is retail inflation, which erodes the purchasing power of money.

The RBI has highlighted the risk to inflation trajectory in its Monetary Policy Statement, dated February 5, 2021. But despite this, interest rates on bank fixed deposits and Small Savings Schemes (SSS) are expected to remain low.

Wondering why?

Well, first, the six-member Monetary Policy Committee (MPC) decided to continue with the accommodative stance for as long as necessary--at least during the current financial year and into the next financial year--to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy.

Second, the government is borrowing aggressively. The full-year borrowing program of the government in the current fiscal year is Rs 12.80 lakh crore. For the next fiscal year, i.e. 2021-22, the Union Budget 2021 states that it would be around Rs 12 lakh crore. Basically, when the government borrows aggressively, it cannot let the interest cost burden to rise faster than the nominal GDP growth, else servicing the borrowings becomes a critical issue.

The Indian bond markets are already worried about higher government borrowings, as the country already has a debt-to-GDP ratio of nearly 70%. Plus, the fiscal deficit target has widened to 9.5% of GDP for the current fiscal year, while it is estimated to be 6.8% of the GDP in the next fiscal year i.e. 2021-22, and then expect it to gradually reduce to 4.5% of GDP by the fiscal year 2025-26.

These decisions of the government to support growth by keeping fiscal deficit targets on the back burner might not go well with senior citizens--as it means that interest would stay low for now.

If you may remember, the government typically borrowed Rs 4.5-6 lakh crore every financial year, about 8-10 years ago and then 10-Year G-sec yields hovered around 8%. Higher interest burden kept the government borrowings in check. Thereafter, inflation came off sharply in the next few years and bond yields followed.

Today, we are facing a dissimilar situation. The yields have anchored around 6% levels with RBI's timely intervention on liquidity management and the government's borrowing has shot up substantially doubled in the last 8-10 years.

In my view, the next few years may not be very different. The question is how long the yields can stay lower if the RBI decides to tolerate inflationary pressures up to a point. You see, it is the 10-year G-sec yields that set the tone for the interest rates on Small Saving Schemes.

With interest on Small Saving Scheme rates reduced, and lower borrowing cost (pursuant to RBI's monetary policy action), banks too have cut interest rates on Fixed Deposits (FDs).

The real returns (also known as inflation-adjusted returns) earned on bank fixed deposits and Small Saving Schemes is barely anything, and in some cases even negative. As a senior citizen, if you thought longer tenure deposits could offer a higher return, you will be disappointed. And to top it up, interest over Rs 50,000 per annum is taxable under 'Income From Other Sources' as per your tax slab.

As a retiree, if you rely entirely on fixed income instruments, you may not be able to meet your retirement needs comfortably. You would feel the pinch of the rising cost of living, particularly in metro or Tier-I cities.

To make up for the rising cost of living, it makes sense for senior citizens to allocate 25-30% of the investment pool to equities via diversified equity-oriented mutual funds. You may consider amongst the best Large-cap Fund, a Multi-cap Fund, and an Aggressive Hybrid Fund and diversify your holdings sensibly.

Choose schemes after you have assessed a host of quantitative and qualitative parameters, and not just the past returns, because it may not be indicative of the future returns. Also, understand the investment philosophy, processes, and systems followed at the mutual fund house. This would enable you to make a prudent choice, take a calculated risk, and potentially maximise returns.

If you already hold certain equity-oriented mutual fund schemes, I suggest seek professional advice to review and rebalance your mutual fund portfolio, it may help you...

• Align the investments as per your risk profile and investment objectives
• Reset the asset allocation within the limits best suited for you
• Incorporate changes in cash-flows
• Help optimally structure and diversify the portfolio (which is one of the basic tenets of investing)
• Facilitate portfolio consolidation and rebalancing
• Weed out consistently underperforming and unsuitable investment avenues
• Ensure adequate liquidity of the portfolio
• Potentially improve the risk-adjusted return of the portfolio

If you are clueless about where to look and whom to approach, I strongly suggest that you opt for PersonalFN's Mutual Fund Portfolio Review service.

Coming to how you, as a retiree, can earn a regular income, here are four ways:

1. SWP from Mutual Funds - Systematic Withdrawal Plan (SWP), a facility offered by mutual fund houses, is a good idea to create a cash inflow stream post-retirement.

   Through an SWP, you can withdraw a fixed sum of money from a mutual fund scheme regularly (monthly, quarterly, half-yearly or annually) and hold the potential to clock returns on the remaining investments over a period of time. It not only provides you with a fixed source of income, but also inculcates a disciplined approach to spending it. Following are the benefits of opting for SWP:

   • Facilitates better planning of withdrawals, as per your need
   • Enables rupee-cost averaging
   • The remaining investments/units would benefit from the power of compounding
   • Can be one of the effective ways to source your retirement needs

   Having said that, keep in mind the withdrawals are subject to tax.

2. Bank Fixed Deposits (Monthly or Quarterly Interest Pay-out Plan) - To earn a regular income from a bank FD, choose the appropriate plan--a monthly or quarterly interest pay-out plan. Only then will your liquidity and cash flow retirements be met.

   This will work better to manage your cash-flow needs during retirement. With the surplus money that you don't need immediately in a lump sum, go with the reinvestment of interest plan with suitable investment tenure.

   The principle of diversification suggests, although fixed deposits have become less attractive today, you still can't avoid them completely.

3. Senior Citizen Savings Scheme (SCSS) - This you may have heard off and know. SCSS is a government-backed small saving scheme suitable for retirees aged 60 years and above, and the investments can be done in single or joint name with the spouse for a term of 5 years. An individual of the age between 55 years and 60 years who has retired on superannuation or under Voluntary Retirement Scheme (VRS) is eligible to open an SCSS account.

   The SCSS account can be opened in an individual capacity or jointly with your spouse (husband/wife). Nomination facility is available at the time of opening and also after opening of the account.

   The maximum lump sum deposit permissible under SCSS is Rs 15 lakh, while the minimum is Rs 1,000. Investments in SCSS are eligible for deduction (upto Rs 1.50 lakh per annum) under Section 80C of the Income Tax Act, 1961.

   The interest on SCSS is payable on a quarterly basis and applicable from the date of deposit to 31st March/30th June/30th September/31st December. Note that if you do not claim the interest, such interest shall not earn additional interest. Hence, make it a point to claim the interest you earn on SCSS.

4. Rental Income from Property - If you have invested in a second residential property during the wealth accumulation phase of life, consider letting it out on lease/rent. Likewise, if you have built a significant retirement corpus, consider purchasing a commercial property which can fetch a respectable monthly income by the way of rent/leave & license fee. Rental income/license fee is an important source of earning for retirees and including such income while managing your cash-flows may help you plan your finances better.

Keep in mind, effective financial planning with suitable asset allocation will help you live a blissful, rich, and a fulfilling retired life -without having to worry about how you would meet the expenses.

Happy Investing!

Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter

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