How to use popular saving instruments to generate regular income for retirees?

One of the biggest worries of elders (above 60), who don’t have the security of a pension, is how to generate regular income for the rest of their lives. The other big problem is to ensure that the portfolio continues to grow (and beat inflation) and increase the portfolio longevity.

But in this article, let’s focus on income generation first.

Three useful low-risk instruments that can come in very handy in income generation for senior citizens are the Senior Citizen Savings Scheme (SCSS), Post Office Monthly Income Scheme (POMIS) and RBI Floating-Rate Savings Bond (FRSB).

Let’s see how these can be used together to generate income.

Senior Citizen Savings Scheme: SCSS allows a person above the age of 60 to invest up to ₹30 lakh and generate 8.2% in annual interest income. This translates to about ₹2.46 lakh annually or ₹20,500 monthly. A senior citizen couple can together earn about ₹41,000 monthly in SCSS interest income if both can park ₹30 lakh each in their individual SCSS accounts. 

Do note that while the current rates are high at 8.2%, the good thing is that the rate at the time of making SCSS deposit is fixed for the entire tenure of 5 years, even though SCSS gets reviewed by the government. every quarter. The tenure of SCSS is 5 years and one can extend it for 3 more years at the then prevalent rates.

Post Office Monthly Income Scheme: POMIS is another safe interest-bearing instrument which allows one to invest ₹9 lakh per person. The current rate of interest is 7.4%. So, if the husband and wife together park ₹18 lakh (in two individual accounts of ₹9 lakh each) in POMIS, then together, the senior couple can generate about ₹1.33 lakh yearly or ₹11,100 monthly in interest income. The POMIS too has a tenure of 5 years.

RBI Floating Rate Bonds: The third option for conservative retirees looking to generate decent interest income is RBI Floating Rate Bonds (RBI FRSB). The current interest rate on RBI Floating Rate Bonds is 8.05% per annum and the bonds have a tenure of 7 years. But there is a small issue. The rates are not locked and rather, ‘float’, as the name suggests and are reset every 6 months. 

There is a pre-approved and fixed formula for interest rate calculation on these Floating Rate Bonds. It is pegged with the prevailing National Saving Certificate (NSC) rates with a spread of 0.35% over the respective NSC rate. The current NSC rates are 7.70% and so, adding the +35 basis points spread, we get 8.05% as the rate on RBI FRSBs.

Now isn’t it a risk that FRSB rates float and can go downwards also in the near future? Yes, that is a definite risk of that happening. But there is something in past NSC rate data that suggests that the rates may not fall too much. The NSC rates since FY 2017-18 have seen the highs of 8.5% and the lows of 6.8%. 

So, if the past is any indication for the future, then if we believe that NSC rates may not fall below 6.8% for at least the next few years, then FRSBs at 0.35% more, can be expected to give a reasonable 7.15% or more in interest.

As we saw above, ₹60 lakh parked in SCSS will generate ₹41,000 monthly. ₹18 lakh parked in POMIS will generate ₹11,100 monthly. This totals ₹52,000 per month.

Whether it is enough for a retired couple today or not will depend on their lifestyle, cost of living in their city, medical expenses, etc. But nevertheless, it is a decent level of income for many, even though after a few years of inflation, it wouldn’t seem much.

However, in case more income is required, a proportionate amount can be parked in FRSBs too to further generate interest income. Suppose if ₹1 crore is to be deployed, then ₹60 lakh goes to SCSS, ₹18 lakh goes to POMIS and the remaining ₹22 lakh goes to FRBs. In this case, the approx. monthly pre-tax interest income will be about ₹66-67,000.

The interest income from all these instruments is fully taxable. So, this can be useful for those in lower tax brackets.

Note: These days, bank fixed deposits are also offering high 7-8 percent to senior citizens. So even that can be considered as long as one sticks with large or systemically important banks.

Invest some percent in equities

We saw how a combination of SCSS, POMIS and FRSBs can help generate decent interest income for the retirees/ senior citizens. However, given that these are pure debt instruments and offer no capital appreciation (only interest), they will not be useful to beat inflation in the long term.

It is for this reason that it is advisable to park a part of the portfolio in equities (or equity funds). Depending on the size of the available corpus, risk appetite and income requirements, about 25-35% equity exposure can be considered to extend portfolio longevity.

This will ensure that at least a part of the corpus is working to generate inflation-beating returns.

Dev Ashish is a Sebi-registered investment adviser and the founder of Stable Investor.