With retirement comes the risk of curtailed income, or worse, no income at all. This can be daunting, especially in your golden years when you want to enjoy the fruits of your hard work. Fortunately, there are certain financial instruments through which you can continue earning and spending the way you used to pre-retirement.
These instruments offer monthly income, which of course, comes from your savings and investments made early on in life. Opting for these instruments is more prudent than dissolving all your savings and consolidating funds in a lump sum.
What are these instruments, and how can they help you earn a monthly income from your retirement savings or corpus? Keep reading to find out.
1. National Pension Scheme (NPS)
The NPS offered by the Indian Government is one of the most cost-effective retirement investment opportunities available in the country today. You invest a small amount in NPS every month until you're 60. After which, you subscribe to a monthly pay-out.
The minimum deposit amount to start and maintain an NPS is Rs. 500, and there is no upper cap. You can invest as much as you want in your NPS account. In fact, since NPS is a market-linked instrument which invests in diverse asset classes, your chances of earning stable returns go up if you invest more.
NPS predominantly invests in four asset classes. These include government securities and bonds, corporate bonds, equity and alternate investment funds (AIF). A significant advantage of investing in NPS is that it lets investors toggle the allocation limit towards each asset class.
For example, when starting your NPS, you can allocate a higher percentage towards equity and corporate bonds. Alternatively, if you're risk averse and are happy with modest returns, your NPS allocation can rely heavily on government bonds and corporate securities more than AIFs and equities.
Whatever your NPS asset allocation strategy may be, the final returns depend on the performance of all asset class allocations chosen by you. This is why it’s best to maintain a balanced portfolio with investments in all four asset classes.
Monthly income from NPS through Annuities
Know that NPS is a long-term investment vehicle, and you can enjoy its full benefits once you attain 60 years of age. After you turn 60, you must allocate at least 40% of your accumulated corpus to purchase annuities (a form of insurance entitling investors to monthly or annual sums).
It is through these annuities that you will receive a monthly pension. You will receive the rest of the corpus as a lump sum, which you can invest further in other instruments to earn returns. You can also increase your annuities percentage from 40% to higher. Doing this will increase your monthly pension amount and reduce the lump sum you are bound to receive.
Remember that if your NPS corpus is up to Rs. 5 lakhs, you can withdraw the entire lump sum amount without purchasing any annuities. Also, premature withdrawals from NPS are allowed only after 5 years of lock-in. However, there are specific withdrawal conditions for prematurely closing an NPS account.
NPS Tax Benefit
Here are the different types of NPS tax benefits investors are eligible for:
Scenario
Tax Benefit
Employees on self-contribution
Get 10% tax deduction on salary up to Rs. 1.5 lakhs under Section 80 CCE.Additional tax rebate up to Rs. 50,000 under Section 80 CCD (1B), over the ceiling of Rs. 1.5 lakhs under Section 80 CCE.
Employees on Employer Contribution
Get 10% tax deduction on salary up to Rs. 1.5 lakhs. However, applicants are eligible for a 14% tax deduction up to Rs. 1.5 lakhs if NPS contribution is made by the Central Government under Section CCD (2).
Tax benefits for self-employed
Get a 20% tax deduction on gross income up to Rs. 1.5 lakhs under Section 80 CCE. Get additional tax deduction up to Rs. 50,000 over and above the ceiling of Rs. 1.5 lakhs under Section 80 CCE.
Types of Annuity You Can Opt For
Immediate Annuity
Deferred Annuity
This is the most basic type of annuity you can purchase while generating retirement income from NPS. Here, you make one lump sum contribution, which is converted into a steady stream of income for a specific time period.
Deferred annuity is when your NPS promises to pay you a regular income or a lump sum, depending on your annuity purchase, at some future date. You can stay invested in NPS till 75 years of age. After which, you can collect deferred annuity in lump sum, or periodic withdrawals.
Both these types of annuity - Immediate and Deferred can be purchase from any Life Insurance company who manufacture these products.
2. Systematic Withdrawal Plan (SWP)
Another reliable way to reinstate your monthly income is through Systematic Withdrawal Plans or SWPs. An SWP allows investors to withdraw their amount invested in mutual funds at a regular frequency, which can be monthly.
For instance, suppose you invested Rs. 50,000 in SBI Blue Chip Mutual Fund for 1 year with an SWP of Rs 1000 per month at 10% ROI. Here is what your investment will look like after monthly withdrawals.
Months
Opening Balance
Withdrawal
Return on Investment
Closing Balance
1
50,000
1000
408
49,408
2
49,408
1000
403
48,812
3
48,812
1000
398
48,210
4
48,210
1000
393
47,604
5
47,604
1000
388
46,992
6
47,604
1000
383
46,375
7
46,375
1000
378
45,753
8
45,753
1000
373
45,126
9
45,126
1000
368
44,494
10
44,494
1000
362
43,856
11
43,856
1000
357
43,214
12
43,214
1000
352
42,565
4,565
And so on, it goes until you earn a total return of Rs. 4,565 at the end of your 1-year tenure.
Now, this is an example with a very small amount. Imagine the ROI you can continue earning on big mutual fund investments even when you keep withdrawing through an SWP. An SWP ensures monthly returns while your remainder investment yields significant ROIs. Moreover, you can easily set or reset the amount you wish to withdraw every month online.
*Please note that this is a hypothetical scenario. In real life, mutual funds may not receive a synchronous cash flow or return on investment.
3. Dividends
One way to earn monthly income from mutual funds is through SWPs; the second method is dividends. For this, you must start building your financial portfolio at the right time with the right mix of dividend-yield debt and equity.
In simpler terms, you must invest in dividend-providing mutual funds or stocks. Not all mutual funds offer dividends. This is why it's prudent to have a wealth manager who can help you choose the right dividend mutual funds /Stocks. You can also scope for them online.
Typically, the underlying stocks of dividend yield mutual funds comprise of companies that have strong financials.
Dividend mutual funds may distribute monthly dividends, which become your regular stream of income after retirement. However, bear in mind that these monthly dividends may fluctuate in terms of their amount every month.
4. Post Office Senior Citizens Savings Scheme (SCSS)
Another excellent initiative by the Government of India, the Senior Citizens Savings Scheme allows senior citizens to invest a lump sum, individually or jointly, to receive regular income along with certain tax benefits.
You can invest in this scheme by visiting any post office and opening an SCSS account with them. Presently, this scheme offers a 7.4% guaranteed return with quarterly payouts credited on the first day of January, April, July and October every year.
The maximum duration for SCSS is 5 years, but you can opt for an extension of 3 years after maturity. Know that you can only make one lump sum deposit in your SCSS account in one year. The minimum single instalment amount per year is Rs. 1000 and the maximum is Rs. 15 lakhs.
The post office SCSS scheme comes under the purview of Section 80C, which means, you can claim an annual tax rebate of up to Rs. 1.5 lakhs on it.
Over to You
Need some expert guidance to build your retirement corpus? Turn to Tata Capital Wealth! Allow our financial experts to craft and manage your portfolio, so you get a head start with retirement planning. From helping you select suitable instruments to assessing their long-term impact on wealth creation, we can help you improve your personal financial practices.
14 October 2022
7 mins read
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