Retirement Planning for the Senior Citizen

Most people see retirement as that stage of life when you have the time to enjoy, slow down and relax, but do not have the financial resources to support the same. But this notion is not correct. One can cut the cake and eat it too, even post-retirement. Read on to learn everything you need for effective financial planning for senior citizens.

All you need to know about the Products for the Retired:

Senior Citizen’s Saving Scheme (SCSS)        

This government-backed scheme is available to all Indian residents who are above the age of 60 years. One can invest in this savings tool through a lot of channels such as the Post Office and banks (public as well as private sector). Some of the salient features of this scheme are:

1. Rate of Interest: It is decided by the Ministry of Finance and reviewed every quarter. The interest on deposits in this scheme is compounded and credited every quarter. For the second quarter (FY23-24) the rate has been kept at 8.2% as of 1-Oct-2023.However, it must be noted that the interest payable on the deposits is fixed on the date of investing. Only fresh contributions are affected by any changes in the interest rates.
2. Contribution: The minimum contribution in SCSS is Rs. 1000. Further contributions can be made in multiples of Rs. 1000. The maximum limit has been kept at Rs. 30 Lakhs.
3. Maturity Period: The tenure of these deposits is five years. At the investor’s discretion, it can be extended for a period of another three years. This extension facility can be availed only once and within one year of the original maturity date.
4. Tax Rules: Investments done in SCSS are eligible for tax deduction as per Section 80C. Interest earned on these deposits is taxable. As per the new tax regulations, if the interest earned (from SCSS deposits) exceeds Rs. 50,000 in a financial year then TDS (Tax Deducted at Source) will be applicable.
5. Risk: As this is a government-backed scheme, it is considered an extremely safe investment tool.
6. Exception: Though the eligibility age is 60 years, as an exception it can be extended to individuals who are at least 55 years old provided they have retired under applicable Voluntary Retirement Scheme or superannuation rules.

Post Office Monthly Income Scheme (POMIS) Account?        

This monthly income scheme allows people to invest a certain amount of money every month and interest on the same. One can invest through any post office in India and also transfer the account from one PO to another. Investments in POMIS accounts can be held individually or jointly.

One person can also have multiple POMIS Accounts. The aggregate balance in all these accounts should not exceed Rs. 4.5 lakhs (individually held accounts) or Rs. 9 Lakhs (co-owned accounts). Premature withdrawal is permitted subject to some discount %.

This monthly income scheme allows people to invest a certain amount of money every month and interest on the same. One can invest through any post office in India and also transfer the account from one PO to another. Investments in POMIS accounts can be held individually or jointly. One person can also have multiple POMIS Accounts. The aggregate balance in all these accounts should not exceed Rs. 9 lakhs (individually held accounts) or Rs. 15 Lakhs (co-owned accounts). Premature withdrawal is permitted subject to some discount %.

1. Rate of Interest: The interest rates are fixed on a yearly basis. As on 1-Oct-2023, the applicable yearly interest rate is 7.4% compounded annually but payable monthly.
2. Contribution: One can start investing in these schemes with just Rs. 1000. Further deposits need to be in multiples of Rs. 1000
3. Maturity Period: The maturity period is five years from the date of opening the account. However, one can continue to earn interest till after two years of maturity, in case the amount has not been withdrawn.
4. Tax Rules: Investment in POMIS accounts or monthly interest earned on these deposits is subject to tax as per the taxpayer’s income tax slabs. However, there is no tax deduction at source.
5. Risk: This scheme is perfectly suited to investors who are risk-averse or are looking for capital protection.

Senior citizen Bank FDs        

Fixed Deposits are a great way to park a lump-sum amount of money and let interest accrue on the same. They are a safer alternative (as compared to equity) and offer a guaranteed income. Also, most of the banks offer digital banking and one can open a Fixed Deposit at the click of a button.

1. Rate of Interest: The interest rates vary from one bank to another. However, senior citizens are entitled for a higher interest rate (+0.5%) as compared to other investors. Also, one can choose the periodicity of the interest payment – cumulative (i.e. at the time of maturity along with the principal amount) or on a regular basis (i.e. quarterly, etc.)
2. Contribution: Fixed Deposits can be started with minimum contribution of Rs. 1000 to Rs. 5000. There is no maximum limit on investment in Fixed Deposits.
3. Maturity Period: There are multiple plans with different maturity periods available. The tenure can range between 7 days to 10 years. One can choose as per their preference and need.
4. Tax Rules: Section 80TTB provides that senior citizens can claim tax exemption till Rs. 50,000 on interest income from deposits maintained with banks, co-operative banks, etc. Also, TDS is not applicable on such income till Rs. 50,000. To get this benefit, senior citizens need to fill and submit the Form (15H) to the concerned financial institution.
5. Risk: In Fixed Deposits, one is assured of a pre-determined interest. Hence, they rank low on the risk spectrum.

Mutual Funds        

Mutual Funds are the new buzzwords in the financial market. They have the potential for bringing growth and wealth creation in the investor’s portfolio, including senior citizens. In mutual funds, the fund house pools in money from a group of people and then invests the corpus across multiple asset categories. What makes Mutual Funds a lucrative option for investors is that one can choose a scheme based on their risk appetite, financial goals and investment horizon.

1. Rate of Interest: Mutual Funds do not offer any guaranteed returns. One can only assess the potential of a scheme based on its past performance, market trends, etc.
2. Contribution: One of the most lucrative aspect about Mutual Funds is that one can start investing in Mutual Funds with contribution as low as Rs. 500. Systematic Investment Plan (SIP) allows investors to invest a fixed sum of money on a periodic basis. Investors benefit immensely from this flexibility as they can choose the amount as well as the frequency of contribution. On the other hand, if one wants to make a one-time investment (lump-sum amount), that facility is also available.
3. Maturity Period: Mutual Funds do not have a maturity period. Rather they have a holding period i.e. the minimum duration for which the funds should remain invested in the scheme. Withdrawals before completion of the holding period attract exit load.
4. Tax Rules: Investment in ELSS Mutual Funds qualify for tax deduction as per Section 80C. Gains from equity Mutual Funds which are held for a period more than one year are exempt from tax, if the value of gain does not exceed Rs. 1 Lakh. Gains beyond that limit are subject to 15% tax. In case of debt mutual funds, gains (after the three-year holding period) are taxed at 20%.
5. Risk: The risk quotient in mutual funds is dependent on the scheme’s objective and the asset categories in which the scheme invests. For instance, equity mutual funds are comparatively riskier than debt mutual funds. Hybrid or balanced Mutual Funds are relatively less risky as they invest in debt as well as equity.

Tax-free bonds        

Tax-free bonds are issued mainly by government-backed entities and have the best safety ratings. These are long term investments with low liquidity. The maturity tenure ranges between 10 to 20 years. The interest rate is the coupon rate of the bond and the gains are exempt from tax. Though not widely used, these can be taken by investors who are planning way in advance and do not require the funds in the near future.

?Strategies to manage retirement corpus post retirement:

Annuity route        

1. Annuity plans are structured to offer guaranteed and steady income post one’s retirement. In this method, a lump-sum money is invested by the investor in the financial institution’s annuity plan. The annuity makes the payments to the investor at a fixed period of time (or series of dates). The periodicity of the payments can be chosen by the investor as per their needs and financial goals.
2. The payout or interest in annuity plans depends on a host of factors such as tenure of the plan, type of payout (guaranteed or flexible based on performance of underlying annuity), etc.? There are two types of annuity plans – immediate (payments start post the initial investment) or deferred (payments start at a future date).

Mutual Fund SWP route (Systematic Withdrawal Route)        

1. For most people, when you say the word “Mutual Funds”, they are likely to think of Systematic Investment Plans (SIPs). However, there is another facility offered by Mutual Funds, which can be an investor’s delight especially post retirement.
2. Systematic Withdrawal Plan or SWP is an arrangement under which a pre-determined sum can be withdrawn from one’s mutual fund investments on a regular basis. The frequency of withdrawal can be monthly, quarterly, bi-annually, or annually as per the needs of the investor.
3. This set-up becomes especially useful for retirees who do not have a pension or other such regular source of income.
4. Just like SIP, leveraging SWP is a quick and hassle-free process. Only thing people need to be careful about is the choice of mutual fund scheme and the amount to be withdrawn through SWP.
5. Generally, all fund advisors suggest that investors should withdraw an amount which is a little lesser than the expected returns so that they do not eat into their capital investment. For instance, if an investor has invested in a mutual fund scheme which is likely to generate a return of 9%, it is advisable to take out only up to 7% through SWP.

Reverse Mortgage        

1. Reverse Mortgage Loan (RML) is another financial tool which can be leveraged by senior citizens to manage their retirement corpus. This product was introduced in 2007 by the Union Government.
2. It can help retirees to remain financially independent by generating an additional income source for people who have (self-occupied or self-acquired) home in India.
3. For a layman, a reverse mortgage loan is the opposite version of a traditional home loan. This facility enables a senior citizen to mortgage their owned property to a financial institution such as bank and receive a regular income against the same. The individual (borrower of loan) can continue to stay in the property mortgaged till the end of their life.

Tax Planning for retirees

Once you become a senior citizen, there are some additional benefits that become available to you.

Understand the tax implications of investment options        

Most people focus only on the return potential while choosing their investment tool. However, it is important to check the net return (i.e. post tax application on maturity).

For instance, in case of mutual funds, long term capital gains are exempt from tax (till Rs. One Lakh). ?In pension plans, the monthly annuity payouts are subject to tax as per the individual’s applicable tax slabs.

Tax Exemption Limit        

Senior citizens enjoy a higher tax exemption limit. For individuals above the age of 60 years (but below 80 years) the exemption limit is Rs. 3 Lakhs. The same increases to Rs. 5 Lakhs once an individual crosses the 80 years’ age limit.

Utilize Section 80C        

This section is usually all taxpayers’ favorite. One can get a deduction (till the value of Rs 1.5 Lakhs) by investing in the eligible avenues such as premium paid for life insurance, investment in tax-saving bank deposits or mutual funds, investment in Provident Fund, pension plans, post-office saving schemes, etc.

There are numerous investment avenues which qualify for deduction as per Section 80C. One can choose depending on one’s need and preference. Many of these investment options give a higher return or interest to senior citizens, making this tax planning facility even more lucrative.

Payment of advance tax        

All tax payers (salaried, professionals, business owners or freelancers) are required to pay advance tax if the total tax amount is higher than Rs. 10,000. According to the provisions of the Income Tax Act, senior citizens (who do not have business or professional income) do not need to worry themselves with payment of advance tax.

Income from savings account        

As per Section 80TTB, senior citizens can claim a deduction (till the value of Rs. 50,000) for income earned from deposits in bank savings account, post office or in co-operative societies. The only condition is that the interest earned should be a part of the individual’s taxable income.

Health Insurance        

Health insurance is important for everyone, but it becomes more critical as you age. The probability of medical emergencies as well as the treatment costs increase significantly with age. Adequate medical insurance takes care of such expenses, gives the much-needed peace of mind as well as earns you tax benefits. In case of senior citizens, insurance premium (till Rs. 50,000) is eligible for tax deductions as per the Income Tax Act (Section 80D).

In conclusion:

Retirement can be a tricky stage of life – On one hand you feel relieved that you have fulfilled all your responsibilities and are done with your working days (for some people). However, on the other hand it can be an overwhelming and distressing feeling when you do not want to depend on anyone else financially and still take care of all your regular expenses and lifestyle.