Where to Invest Retirement Money – Smartly

Retirement means the end of earning period for many, unless one chooses to work as a consultant. For retirees, making the best use of their retirement corpus that would help keep tax liability at bay and provide a regular stream of income is of prime importance.

Building a retirement portfolio with a mix of fixed income and market-linked investments remains a big challenge for many retirees. The challenge is not to outlive the retirement funds – one retires at 58 or 60, while the life expectancy ..

Open Free Zerodha Account Today : Zerodha Open Demat Account Link

Here are few investment options for the retired to provide for their monthly household expenses. The idea is to build a retiree portfolio with a mix of these products.

Also Read Start Investing for Retirement – Interesting Strategy

Now Lets get to the important Question in the room.

Where should I Invest Retirement Money?

When you invest for retirement, you typically have three main options:

  1. You can put the money into a retirement account that’s offered by your employer, such as a 401(k) or 403(b) plan. These plans are great deals because the money will grow tax-free until you withdraw it in retirement. What’s more, you escape taxes either on the money you put into the plan or the money you withdraw from the plan, depending on whether you choose a traditional or Roth option.
  2. You can put the money into a tax-advantaged retirement account of your own, such as an IRA. IRAs offer similar tax breaks to 401(k)s, though some of the eligibility rules differ.
  3. You can put the money into a regular investment account that doesn’t have tax advantages.

The first two options are far better deals, but there are limits on how much money you can put into them each year. If you’ve put all the money you’re allowed into tax-favored plans and you want to save even more for retirement (for example, because you got a late start in saving and need to make up for lost time), you’ll have to use a regular investment account.

Also Read How to Build Your Own Retirement Plan – Best Way

Where to Invest Retirement Money?

There are three main kinds of investments, or “asset classes”: stocks, bonds and cash. Your retirement accounts should probably contain a mix of stocks and bonds – and maybe cash too.

You can invest in stocks and bonds in one of two ways: by buying them individually or by buying them via a mutual fund. A mutual fund is simply a collection of stocks, or bonds, or cash equivalents – or sometimes a mix of all three.

Some people also invest in “hard assets” like real estate or gold, but those aren’t always great choices for the average person’s retirement account.

Stocks and Bonds – Where to Invest Retirement Money

Where to Invest Retirement Money

Unfortunately, it rarely works out that way. The good news, however, is that smart retirement investing is actually much, much easier.

The key is having the right mix of stocks, bonds and cash. The mix of those three asset classes is known as your “asset allocation.” Pick your asset allocation wisely, and it will do the work for you.

Also Read Top 8 Ways to Invest Confidently in Retirement

Should my asset allocation change as I get older

Absolutely. That’s because different investment mixes are riskier than others, and your tolerance for risk decreases as you age.

Stocks – which are shares of ownership in a corporation – provide the most juice for long-term growth. But they’re volatile, so they can lose you a lot of money in the short term. When you’re young, the long-term growth potential of stocks outweighs the risks. When you’re older, not so much. So you should scale back on the percentage of stocks in your portfolio over time.

Bonds – which are basically interest-bearing loans that you provide a company or government – give you weaker long-term returns than stocks do, but less volatility. So you should increase the percentage of your holdings in bonds over time.

Cash – or “cash equivalents,” such as money-market funds – are the least risky of all. But they also have the lowest returns. You might not need cash in your retirement account at all until you’re approaching retirement age or in retirement.

Open Free Zerodha Account Today : Zerodha Open Demat Account Link

How much should I save if I want to retire early?

To step off the corporate treadmill in your 50s or early 60s and maintain anything close to your standard of living, you need a seriously big retirement kitty.

How serious? You’ll likely need assets worth 10 to 16 times your salary by the time you leave your job. A 45-year-old making $120,000 who hopes to retire at age 60, say, should already have nearly $700,000 set aside. (See the Retire Early calculator.)

You can get by with less if you’ll have other sources of income. If that same 45-year-old has a typical old-fashioned check-a-month pension, for example, he might need only $432,000 in savings to be on track. If you expect to hold down a scaled-back job for your first decade of retirement, you can also get by with less.

Still, your target is a big number, and to reach it you’ll have to save diligently, invest aggressively, and keep taxes and expenses from eroding your returns.

Here are some more options that are worth looking into while investing your money during retirement,

Also Read Tax-Savvy Investment Strategies for Retirement Accounts

Senior Citizen Saving Scheme (SCSS)

One of the safest for senior citizens, it currently offers 7.4 percent per annum, with the interest being paid out quarterly. Since it is backed by the central government, the returns are assured, but it comes with a lock-in period of five years. You can invest up to Rs 15 lakh and rely on quarterly interest pay-outs for liquidity needs. Moreover, SCSS also offers tax deductions under section 80C.

The SCSS interest rate is amongst the best on offer amongst debt instruments, despite the 120 basis points rate reduction in March. “We advise our clients to invest in SCSS before considering other options. The high and assured rate of returns make it a compelling avenue for regular income,” says Ashish Shah, Co-founder, Wealth First Portfolio Managers.

Where to Invest Retirement Money

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

Another product designed specifically for senior citizens, Pradhan Mantri Vaya Vandana Yojana (PMVVY) is offered by the Life Insurance Corporation of India (LIC). Like SCSS, you can invest up to Rs 15 lakh and it also promises a return of 7.4 percent. A government-backed scheme, it comes with no credit risk and a longer tenure of ten years, making it suitable for retirees.

The scheme was to end on March 31, 2020, but the central government decided to extend until March 31, 2023 due to its popularity amongst retirees. However, the interest rate was slashed from 8 percent to 7.4 percent. Yet, it remains an attractive proposition for senior citizens, offering returns far higher than those of fixed deposits.

For example, the State Bank of India’s (SBI) offers an interest of 6.5 percent to senior citizens for fixed deposits with tenures of 5-10 years.

Annuities from life insurance companies

Of late, annuity plans from Life Insurance Corporation of India (LIC) – Jeevan Akshay (VII) and New Jeevan Shanti – are being promoted heavily. This is how annuities work: if you were to purchase an immediate annuity plan, that is, invest a lump-sum in such plans offered by all life insurers, you will get a regular payout.

“Broadly, if you invest a lump-sum now, you get regular payouts – be it monthly, quarterly or annually. The returns work out to 5.75-5.9 percent annually over 20-30 years,” explains Vikram Dalal, Managing Director, Synergee Capital.

Unlike PMVVY and SCSS, annuities offer guaranteed returns over a much longer term of 30-40 years, covering your entire retirement phase.

Now, annuities may sound like an answer to your quest for a long-term instrument capable of yielding assured returns. However, there are better-yielding, long-term avenues such as government securities that you must consider instead of annuities. The entire annuity income is taxable at the slab rate applicable to you.

Unless the annuities market develops further – especially given that 40 percent of your National Pension Scheme’s maturity at age 60 must be invested in an annuity – these are not your best options yet.

Open Free Zerodha Account Today : Zerodha Open Demat Account Link

Government securities

Instead of annuities, financial planners recommend government securities. “Being a sovereign security, it is highly secure, and returns will be in the range of 6.6 to 6.75 percent. You can stay invested for 40 years (bonds with maturities till 2060 are also available).

These work out better than annuities. You also have an option to exit, if the need arises. These bonds have semi-annual interest payments,” adds Dalal. The principal invested is safe as these are sovereign bonds. And, if held till maturity, you will not face any interest rate fluctuation risk either. “You must choose government bonds if fixed returns over the long term is your objective,” he adds.

1 thought on “Where to Invest Retirement Money – Smartly”

Leave a Comment

Share via
Copy link
Powered by Social Snap