Old age is a man’s second childhood – except for one fact. When you are a child, your mistakes are forgiven and there is more than enough time to rectify them. When you are older, you better be cautious.
However, once you start belonging to the ‘senior citizen’ category, you better be extra cautious. Like a child is allowed to go out and play only after he completes his homework, a senior citizen is, implicitly, allowed to make financial mistakes only after he has a sustainable monthly income plan in place. Any senior citizen reading this would resonate with this.
Every person retires with one huge headache –
I don’t have to go to work tomorrow, that’s great! But that also means my salary is going to stop. The pension hardly cuts it!
This headache has a cure, however –
You retire with a large corpus of money!
What you choose to do with this corpus will govern the next phase of your life. A wrong decision of investing this money in a very conservative asset due to fear or in a very aggressive asset due to greed will have grave implications.
You need to be neither fearful nor greedy and should have realistic and sustainable expectations. Here are the options you can consider to generate a sustainable monthly income –
The good old rental income is still one of the most popular monthly income generating instruments –
1. Default risk is low (if you know who to rent out a place to)
2. The asset itself is immune from inflation (debated)
However, here I believe the cons clearly outweigh the pros. The cons being –
1. You may be stuck with a stubborn tenant
This is not a good problem to have especially when you are a senior citizen. The tenant might not pay the rent on time which may make your monthly income go for a toss. A worse situation to face is when the tenant even skips paying rent for a month or two or more!
2. The return is paltry
Even if you have the perfect tenant who pays rent on time the actual rent might not cut it for you!
On an average, the per year rent in the country is about 2.5% of the real estate value. Meaning, if your apartment is worth Rs. 1 crore, you will earn about Rs. 2.5 Lakhs as rent on it per year. This translates to about Rs. 20,000 per month.
This might work for some people, but not for most.
Fixed deposits are crowd favourites… until you know about the SCSS, the PMVVY, the POMIS or the Finpeg Monthly Income Plan.
Fixed Deposits rank higher only than probably rental income in this list. All of the following are superior options to the good old FD’s.
Senior Citizen Savings Scheme (SCSS)
The senior citizen savings scheme (SCSS) is super popular among retirees for three reasons –
1. Backed by the government of India
2. Assured quarterly pay-outs
3. Income Tax benefit
People love guarantees, especially, from the government! If you are one of them, this is a pretty good plan with a not-so-bad return of 8%+ PA which translates to about 2% per quarter.
Additionally, it helps you offset your tax liability by up to Rs. 1,50,000 per year according to Income Tax Act Section 80C.
So, SCSS is easily better than renting out a property. Not only is the return higher, but also the risk is lower. However, there is a catch!
The catch is you can invest only a maximum of Rs. 15 Lakhs in the senior citizen savings scheme – no more. So, between, let’s say, you and your spouse, you cannot invest more than Rs. 30 Lakhs. Might cut it for some, might not for others. However, SCSS could be used in tandem with other income generating assets.
On this Rs. 30 Lakhs, you earn a 2% (minimum) quarterly pay-out which is about Rs. 60,000 per quarter. Not bad, right? However, there is a TDS applicable on interest greater than Rs. 10,000 per year as well as the interest is taxed as per marginal tax slab.
Also, there is a lock-in and an early withdrawal penalty associated with the SCSS. The lock-in period is only 1 year which most people would be fine with. The early withdrawal penalties are applicable as follows –
1. If you withdraw between the 1-year and 2-year mark from the beginning then the early withdrawal penalty is 1.5% of the deposit amount
2. If the withdrawal takes place post the 2-year mark then the early withdrawal penalty is 1% of the deposit amount
3. If redeemed within 5 years (the maturity period), you lose all the 80C benefit from the previous years if you had availed it
So, that’s all you need to know about the Senior Citizen Savings Scheme.
Pradhan Mantri Vaya Vandan Yojana (PMVVY)
As the name suggests, this is similar to the Senior Citizen Savings Scheme (SCSS) described above. There are a few subtle but important changes which go as follows –
1. Fixed interest rate tenure
If you start a SCSS with an 8.3% PA, it will remain at that level for 5 years and then change as per the changing G-sec rates. However, the 8% PA on the PMVVY is fixed for 10 years. This makes the PMVVY more prone to interest rate risk.
2. Difference in interest rate
The rates on SCSS and PMVVY are pretty close to each other. However, SCSS has an explicit sovereign guarantee while the PMVVY has an implicit sovereign guarantee since it is not issued by the government directly but by LIC. If the LIC earns a 7.5% return, the government covers up for the 8% deficit. Right now, the SCSS is offering a higher interest rate than the PMVVY.
3. Pay-out frequency
The SCSS has a fixed quarterly payout. For the PMVVY, you get more flexibility on the pay-out frequencies. You may choose to receive a pay-out every month, every 3 months, every 6 months or even every year.
The SCSS is highly liquid. You will be able to withdraw it at any point in time by paying a penalty, if it applies. The PMVVY, on the other hand, has liquidity issues. You can redeem from the PMVVY only if you or your spouse is terminally ill.
5. Taxation benefits
Unlike the SCSS, PMVVY is not an eligible investment instrument under the section 80C.
So, if liquidity is dear to you the SCSS would be a better option.
The PMVVY would be a slightly better option if you want a monthly pay-out instead of a fixed quarterly pay-out that the SCSS offers.
Both the SCSS and PMVVY limit investment to Rs. 15 Lakhs per account.
Post Office Monthly Income Scheme (POMIS)
Another scheme backed by the government with some variation when compared to the SCSS and the PMVVY.
The important features of the POMIS are –
1. A lock-in of 5 years
2. A maximum of Rs. 4.5 Lakhs can be invested per account
3. The interest rate offered is lower than those of SCSS and PMVVY
4. No taxation benefits
5. As name suggests, the pay-out frequency is monthly and fixed
The only advantage the POMIS has over the other two government backed schemes is that it can be started even if you are not a senior citizen.
It doesn’t make a lot of sense to invest in the POMIS as a senior citizen if you are aware of the SCSS or the PMVVY. All are backed by the government so there is no risk of pay-out or principal default. This means it would be a good idea to simply go for the highest interest rate yielding instrument of the three.
There could be some exceptions, however. If you think that the PMVVY’s monthly pay-out option is better than the rigid quarterly pay-out of the SCSS’s, then PMVVY would be a better choice even though the rate of return of the SCSS is higher than that of the PMVVY. You’ll have to let go of those few basis points of interest rates in favour of convenience.
Mutual Fund Dividends
Mutual Fund Dividends are not suitable for monthly income.
Firstly, dividends are not guaranteed. They (should?) ideally depend up on the performance of the asset pay out the dividend.
For a shareholder of a good company, a dividend is paid out when the company has performed really well and they give out a dividend as a bonus to the shareholder.
Some year(s), the company might not perform as expected or may even be facing losses. The probability of receiving a dividend drastically decreases in either scenario.
However, mutual funds defy this logic.
Some mutual funds promise dividends irrespective of the performance of the mutual fund. When the mutual fund is doing well, the dividend is feasible to be doled out. However, doling out a dividend becomes highly challenging when the mutual fund or the market as a whole is underperforming.
If the mutual fund value hasn’t appreciated and still a dividend is doled out, it means that you are being returned your own money without any appreciation rather with some depreciation.
Sounds like a ponzi scheme, isn’t it? To some extent it is! And sold to millions of unsuspecting senior citizens all over the country every day. Be wary of mutual fund dividends – it is NOT a source of regular monthly income by any measure.
Last, but not the least we have the Finpeg Monthly Income Plan.
This was designed especially for retirees by the research team at Finpeg after putting the plan through all sort of market cycles. Since then we have come across multiple use case
The investment instrument that is used to achieve the Finpeg Monthly Income Plan are mutual funds. The offering of the Finpeg Monthly Income Plan can be easily understood using an investment amount of Rs. 10 Lakhs.
1. Invest Rs. 10 Lakhs in the Finpeg Monthly Income plan to start earning a monthly income of up to Rs. 10,000 from the next month
2. Stick to the Finpeg Monthly Income Plan for a period of 6 years to maximize the chance of capital protection
Although not backed by sovereign guarantee, the Finpeg Monthly Income Plan is a compelling proposition. According to historical simulations, the Finpeg Monthly Income Plan would have always achieved its objectives of a regular monthly income and capital protection for any given block of 6 years over the last 15 years.
Meaning – had you invested in the Finpeg Monthly Income Plan over any of the ~ 2000 6-year blocks in the last 15 years, you would have always received a regular monthly income over the 6-year/72-month period and would have always walked away with a corpus equal to at least the initially invested corpus.
The Finpeg Monthly Income Plan is easily the most compelling monthly income plan for anyone who is looking to generate a monthly income – may he be a senior citizen or not.
Want to know more about the Finpeg Monthly Income Plan? Give us a shout!
Not interested in a Monthly Income Plan but just looking for some new ways of investing mutual funds? Give us a shout!
Lastly, it is wise to know as much as you can about the monthly income plan that you are interested in proceeding with. You have worked hard for all that money and it deserves equal amount of hard work and attention in terms of management.
Senior citizen or not, always make well-informed financial decisions or don’t make them independently.
Hope this was helpful!