How to create a regular income for your retirement

Getting a fixed amount every month after you retire will help you lead a peaceful retired life. Here’s how to create regular income after retirement

Kavya Balaji Dec 19, 2019

Regular retirement income
If there are only a couple of years for your retirement, you need to start making preparations for creating a regular income which will replace your salary. This is true for even for those who are receiving pension. Your pension is not the same as your salary. And the ever-rising inflation would only reduce the value of your pension.

The best way to supplement your pension is through investments. Returns from these need to be organised in such a way that you get a regular income to take care of your needs. Moreover, many retirement investments will start maturing when you are in the fifth decade of your life and you will need to shift to the reinvestment mode.

You need to reinvest and make a plan in such a way that you have a regular income from these investments after retirement. Here are the various options you can target.

Annuities

One of the best options to get a regular income is annuities. With your retirement fund, you can buy an annuity plan from a life insurance company or a mutual fund.

The following are some of the types of annuities in India.

Periodic Annuity:  This annuity will provide you with pay-outs at regular intervals. The intervals are usually monthly. However, the pay-outs can be made in a phased manner at regular intervals such as at the end of the 3rd year, 5th year, 7th year and so on.

Immediate Annuity: Here, you will pay a one-time amount to subscribe to the scheme. The annuity pay-outs will start as soon as you make the payment.

Deferred Annuity:  In case of this annuity, there will be an interval between the premium payments and the annuity pay-outs. The time during which you make premium payments is called the accumulation phase of the scheme. After this phase, the amount will be used for purchase of annuity which will provide pay-outs.

Lump sum Annuity: When a pension plan provides you with a lump sum pay-out instead of monthly pension, it is a lump sum annuity. Such a lump sum pay-out is usually optional and available only partially. For example, in case of the National Pension Scheme (NPS), 40% of the total amount has to be used to purchase an annuity plan and cannot be withdrawn as a lump sum.

Fixed Annuity: As the name suggests, the annuity pay-outs will remain constant throughout the entire period during which the pay-outs happen. However, this plan is a relatively conservative option as the premiums are mostly invested in fixed income investments.

Variable Annuity: This plan will invest in market linked investments and hence there will be variations in the annuity pay-outs, that is, the amount of annuity will vary. The annuity pay-outs will be higher if the market linked investments give good returns. One of the best examples of a variable annuity plan is the government’s NPS.

The most popular annuity option is the Senior Citizens’ Saving Scheme (SCSS) which gives you a lifelong pension, at an interest rate of 8.6 per cent per annum on investments up to Rs. 15 lakh. For people in lower tax brackets, the six-year post-office monthly income scheme providing 7.6 per cent per annum is an attractive option.

Income ladders

You can invest in fixed income instruments like National Savings Certificates (NSCs) or deep discount bonds that give you a predetermined lumpsum on maturity. If you invest in these at regular intervals in your 50s, especially towards the end of the age decade, your investments will mature at regular intervals in your retirement, creating regular income flows.

Monthly Income Plans (MIPs)

Another avenue which can be tapped for a regular income is the monthly income plan (MIP) of mutual funds. An MIP generally invests 80 per cent in debt and 20 per cent in equity. As a result, your investment is safe, and you get slightly higher returns. The advantage of MIP is that it delivers more returns than schemes such as post office savings schemes and fixed deposits. Other advantages are that there is no limit on the investment and you do not have to pay any entry load or any processing charges. The exit load on MIPs cannot exceed 1%. The best part is that there is no lock-in period for MIPs.

However, MIPs have their downsides too. Since MIPs invest up to 20 per cent in equities, they may skip dividend declarations during adverse market conditions. This may deprive you of your monthly pay-out.

Systematic Withdrawal Plans (SWP)

A regular income can also be created from your mutual fund investments through systematic withdrawal plans where your investments in a mutual fund scheme provide you with a regular pay-out. To get this regular income, you need to make investments in a large debt fund with a decent track record since this would secure your principal. The pay-outs are structured in such a way that you become liable only for 10 per cent long-term capital gains tax, which, most often, is very low.

Making reinvestments tax-efficient

Much of the enhanced tax liability happens during the process of reinvestments when you are realigning your assets. If you need to use any of your retirement funds, use funds that will not be taxed. This would be true for options such as Employees’ Provident Fund (EPF), gratuity and superannuation funds. Of course, another income that is tax-free in your hands is dividends from stocks and mutual funds. If you don’t need the tax-free money, you can reinvest the accruing lump sums for the future, but remember that you will be taxed on the returns from these investments.

As far as possible, postpone using annuities since in the present tax dispensation, regular monthly payments or annuities such as those from superannuation funds, pensions and life insurance pension plans are taxable. You are best advised to postpone their use at least till you are 65 years old, after which you get the senior citizen tax benefit. For the same reason, you should also avoid converting some of your mutual fund investments into SWPs since you are bound to take a debt fund SWP to ensure a regular income.

For investments older than one year, you will have to pay 10 per cent tax on the capital gains. If you expect your regular retirement income to be mostly in the form of interests and dividends, then invest in options that have minimum tax liability. You could invest a part of the corpus in MIPs of mutual funds so that you receive monthly, tax-free dividends. Moreover, if you go for MIPs, a major part of your corpus is protected as it is invested in debt securities, while the limited investment in equities yields a better return than pure debt-based funds.

Planning to invest for your retirement? Then, read this article – 5 Risks You Need To Account For In Your Retirement Planning


Kavya Balaji

Kavya Balaji is a senior contributing writer with RupeeIQ. With more than 14 years of experience in the finance space, Kavya loves everything to do with personal finance. She feels financial literacy is important for every household and likes to stick to simple language for explaining personal finance stories. She is a consultant with investment management companies. In spare time, she reads murder mysteries.

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