How To Manage Your Retirement Corpus Efficiently

As we voyage through life, there comes a point when we bid farewell to our careers and embrace the golden years of retirement. However, this transition requires careful planning and proper management of our retirement corpus to ensure a secure and fulfilling future. In this special story, Vardan Pandhare delves into the essential strategies and considerations for effectively managing your retirement corpus

In life, people often have a range of financial aspirations from buying a house and a car to providing for their children’s education and enjoying lavish vacations. Amidst these various goals, managing a retirement corpus often gets relegated to the backburner, as if it can wait until the later stages of life. However, it is vital to recognise that prioritising retirement planning should not be delayed. Neglecting this aspect can have serious consequences for one’s financial security. Therefore, it is imperative to give due importance to retirement and take proactive measures to safeguard one’s financial future.

Developing a well-thought-out retirement strategy is essential to ensure a stress-free and comfortable life during the golden years. With longer life expectancies and the decline of traditional pension systems, individuals must carefully build and manage their retirement corpus to generate income and meet their needs. Retirement is a phase where fixed incomes like salaries cease to exist, and a reliable cash flow becomes paramount to cover expenses in the later years. The misconception that a steady salary is necessary during retirement should be dispelled.

Instead, what one truly requires is a dependable income stream that can keep pace with inflation. The solution lies in designing an investment portfolio that prioritises deploying a corpus for income generation in the retired years. Fortunately, there are financial instruments available that enable you to maintain your pre-retirement lifestyle by continuing to earn and spend from your savings. These instruments offer a monthly income derived from the investments made throughout your life. Opting for these instruments is a wiser choice compared to liquidating all your savings and consolidating funds as a lump sum.

Let’s explore these instruments and how they can provide you with a steady income from your retirement corpus.
 

National Pension Scheme (NPS)

The NPS, offered by the Government of India, stands as one of the most cost-effective retirement investment opportunities in the country today. Under this scheme, you contribute a small amount every month until you reach the age of 60. Once you reach this milestone, you subscribe to a monthly payout from your NPS account. The minimum deposit required for starting and maintaining an NPS account is ₹500, and there is no upper cap, allowing you to invest as much as you desire. As NPS is a market-linked instrument with investments in diverse asset classes, higher investments can enhance the chances of earning stable returns. NPS primarily invests in four asset classes, including government securities and bonds, corporate bonds, equity and alternate investment funds (AIF). 

An advantageous feature of NPS is the ability to adjust the allocation limit towards each asset class according to your preference. For instance, when initiating your NPS account, you can allocate a higher percentage towards equity and corporate bonds. Conversely, if you are risk-averse and content with modest returns, you may choose to allocate more to government bonds and corporate securities rather than AIFs and equities. Regardless of your asset allocation strategy, the final returns depend on the performance of all the chosen asset classes. Therefore, maintaining a balanced portfolio with investments in all four asset classes is recommended.

Monthly Income from NPS through Annuities: It’s essential to understand that NPS is a long-term investment vehicle and its full benefits materialise once you reach the age of 60. At this point, you must allocate at least 40 per cent of your accumulated corpus to purchase annuities, which provide investors with monthly or annual sums as a form of insurance. Through these annuities, you will receive a monthly pension. The remaining corpus will be paid as a lump sum, allowing you to invest further in other instruments to earn returns. 

Moreover, you have the flexibility to increase your annuity percentage beyond 40 per cent, resulting in a higher monthly pension and a reduced lump sum. Keep in mind that if your NPS corpus is up to ₹5 lakhs, you can withdraw the entire lump sum amount without purchasing annuities. Additionally, premature withdrawals from NPS are permitted only after five years of lock-in, subject to specific withdrawal conditions for closing an NPS account prematurely.

NPS Tax Benefit: Investors in the National Pension Scheme (NPS) are eligible for various tax benefits based on their employment status and contributions. 

Here are the different types of NPS tax benefits: 

NPS offers two types of annuity options for generating retirement income:
∎ Immediate Annuity - This is the most basic type of annuity available in NPS. Here, you make a lump sum contribution, which is converted into a steady stream of income for a specific time period.
∎ Deferred Annuity - Deferred annuity promises to pay you a regular income or a lump sum, depending on your annuity purchase, at some future date. You can remain invested in NPS until the age of 75, after which you can collect the deferred annuity either as a lump sum or through periodic withdrawals.

Both immediate and deferred annuities can be purchased from any life insurance company that offers these products.

Generating Monthly Income with SWP

A reliable method to secure a monthly income during your retirement is through systematic withdrawal plans (SWPs). SWPs allow investors to make regular withdrawals from their mutual fund investments, making it an effective incomegenerating strategy. Here is an illustrative example of how SWPs work: Imagine you invest ₹50,000 in a mutual fund with an SWP of ₹1,000 per month and an assumed ROI of 10 per cent. 

Let’s see how your investment unfolds after each monthly withdrawal

At the end of the one-year tenure, you would have earned a total return of ₹4,565. This example demonstrates a small investment amount, but the potential of SWPs shines when applied to larger mutual fund investments. Through SWPs you can secure a consistent monthly income, while your remaining investment continues to grow and generate returns. Moreover, with the flexibility to adjust the withdrawal amount, SWPs allow you to tailor your income according to your needs. Note that this is a hypothetical scenario and real-life mutual funds may experience variations in cash flow and ROI.

Earning Regular Income with dividends
Another avenue to generate consistent monthly income from mutual funds is through dividends. To achieve this, it is crucial to construct a well-balanced financial portfolio with an appropriate mix of dividend-yield debt and equity instruments. Simply put, you need to invest in mutual funds or stocks that are known for providing dividends. However, not all mutual funds offer dividends, so it is prudent to seek guidance from a wealth manager who can help you identify suitable dividend mutual funds or stocks. You can also explore online resources to find these investment options.

Dividend yield mutual funds typically invest in companies with strong financials that regularly distribute dividends to their shareholders. By investing in such funds, you can receive monthly dividends, which can become a reliable income source during your retirement years. Keep in mind that the amount of these monthly dividends may vary each month based on the performance of the underlying assets.

Post Office Senior Citizens Savings Scheme (SCSS)

The Senior Citizens Savings Scheme (SCSS), backed by the Government of India, presents an excellent investment avenue for senior citizens looking to secure regular income and enjoy certain tax benefits. To participate in this scheme, visit any post office and open an SCSS account. At present, the SCSS offers a return of 8.2 per cent (as per the July-September 2023 quarter) with quarterly payouts credited on the first day of January, April, July and October every year.

The maximum duration for an SCSS account is five years with the option to extend it for an additional three years after maturity. Keep in mind that only one lump sum deposit is permitted in your SCSS account per year. The minimum single instalment amount per year is ₹1,000 and the maximum is ₹15 lakhs. Additionally, the Post Office SCSS falls under Section 80C that enables you to claim an annual tax rebate of up to ₹1.5 lakhs on your investments. This makes it an attractive option for senior citizens seeking both financial security and tax benefits.

Additional Tips for Happy Retirement


∎ Stay active - Retirement is a great time to stay active both physically and mentally. Staying active can help you stay healthy and engaged.
∎ Stay connected - Retirement can be a time to reconnect with friends and family. Make sure to stay connected with the people who are important to you.
∎ Give back - Retirement is a great time to give back to your community. Volunteering can be a rewarding way to spend your time and make a difference in the world.

Exploring Mutual Fund Options for Retirement Corpus
When it comes to retirement planning, there are several types of mutual funds you can consider. Here are a few options worth exploring:

Equity Mutual Funds - These mutual funds primarily invest in the stocks of publicly traded companies. While they tend to be more volatile than other types of funds, they also offer the potential for higher returns over the long term. Starting early can be advantageous as early investors have a longer time horizon to invest and can afford to take on more risk. Opting for equity mutual funds, especially those focused on Small-Cap and Mid-Cap stocks, can offer promising returns over time. Additionally, allocating a portion of the portfolio to international and emerging markets funds can provide diversification and capture growth opportunities.

Debt Mutual Funds - Debt mutual funds invest in fixed-income securities such as bonds, debentures and government securities. These funds are considered less risky compared to equity funds and provide a steady source of income. Pre-retirees may prefer income-generating investments and capital preservation. Opting for debt mutual funds, especially those investing in high-quality bonds and offering regular income, can be a suitable choice. Additionally, dividend-paying equity mutual funds and real estate funds can also be considered for income generation.

Balanced Mutual Funds - Balanced mutual funds strike a balance by investing in a mix of equities and debt instruments. They offer the benefits of both equity and Debt Funds and are considered less risky than pure equity funds. As investors approach their 40s and 50s and have a lower risk tolerance, shifting their portfolio towards a more balanced allocation between equity and debt mutual funds becomes prudent. Balanced mutual funds and target-date mutual funds can be excellent options for this age group, providing a mix of equity and debt securities with an appropriate asset allocation for their retirement timeline.

It is crucial to acknowledge that investing in mutual funds always carries some level of risk. Therefore, conducting thorough research and consulting with a financial advisor before making any investment decisions is essential. Additionally, building a diversified investment portfolio that includes a mix of different asset classes can help mitigate risk and provide a well-rounded approach to retirement planning.

Things Retirees Must Remember 
 

Retirement is a time to relax and enjoy your golden years. However, it’s also a time to be financially savvy. Here are three things that retirees must remember:

1. Keep your expenses in check - One of the biggest challenges of retirement is managing your expenses. After all, you are no longer bringing in a regular salary. To keep your expenses in check, create a budget and stick to it.Make sure to factor in all of your expenses, including housing, food, transportation, healthcare and entertainment.
2. Make sure you have enough income - In addition to managing your expenses, you also need to make sure you have enough income to cover your living expenses. If you are relying on a pension, make sure you know how much you will be getting each month. If you are not sure, contact your pension provider. You may also want to consider other sources of income, such as social security or part-time work.
3. Protect your assets - As you get older, you become more vulnerable to financial scams. To protect your assets, make sure you have a will and power of attorney in place. You should also review your insurance policies to make sure they are still adequate.

Conclusion

Managing your retirement corpus is an important part of financial planning to enjoy your golden days in the best possible manner. By starting early and investing wisely, you can ensure that you have enough money to live comfortably in your later stages. Mutual funds can be a good option for retirement planning as they offer a number of advantages. However, it’s important to talk to a financial advisor to get personalised advice on which mutual funds are right for you.