Asset allocation in interest-earning instruments, coupled with smart annuity options, can help you live comfortably through your sunset years.
ASSET ALLOCATION
Aim for a healthy mix of asset classes weighted according to risk appetite
CASH
Advantage: The cash stashed away in a bank account is insured against loss of principal. However, as amounts up to only Rs 1 lakh are insured, the investor should preferably have accounts in different banks.
Disadvantage: When you withdraw from the account, the principal amount reduces, leaving less to reinvest. Lesser principal means reduced interest accrual, and hence, a decline in earnings. Inflation is a matter of concern as well.
STOCKS
Advantage: Equities tend to grow in value, especially in the long term. This means that investors can expect good returns in the future, making them less vulnerable to inflation over a long period.
Disadvantage: While stocks perform strongly over time, they are subject to off years like 2008, and bear markets can eat into the value of blue-chip stocks. If the value of the stock falls, the returns from equity investments drop.
BONDS
Advantage: Bonds usually refer to the National Savings Certificates and other sovereign schemes, which are safe as these are government-backed, pay on schedule at a fixed interest rate.
Disadvantage: As an investor is locked into a fixed interest rate, his buying power is eroded if the rate of inflation increases. Another drawback is that the principal amount carries a reduced value when the bond matures.
OTHERS
Advantage: Investment in mutual funds, real estate, annuities, etc, help diversify a portfolio. Such investments also widen the net of income streams in retirement.
Disadvantage: Real estate is illiquid and can act as a hedge only if reverse mortgage picks up. Annuities are treated as income and taxed accordingly. Like stocks, mutual funds depend on market conditions and carry inherent risks.
Annuity Payout Options | |||
|---|---|---|---|
| Choosing a pension plan is not enough. It’s important to go for an annuity payment option that suits your specific needs | |||
ANNUITY PLANS | DETAILS | PROS | CONS |
| LIFE ANNUITY | Annuity for life. | Income as long as you live. | Payment stops on death, even if it’s shortly after payouts begin. So you may not get the full value of your contract. |
| LIFE ANNUITY WITH RETURN OF PURCHASE PRICE | Annuities for as long as you live. Nominee receives the purchase price of the policy after your demise. | Return of original purchase price to nominee. | The payout is less because of the return of purchase price option. |
| LIFE ANNUITY GUARANTEED FOR 5, 10, 15 YRS & THEREAFTER | Guaranteed annuity paid for the chosen term. After that, it continues for as long as the annuitant is alive. | Annuity for life of the annuitant after the chosen term. | The annuity after the chosen term is less than what you receive in the fixed tenure. |
| JOINT LIFE, LAST SURVIVOR ANNUITY, RETURN OF PURCHASE PRICE | After the death of the annuitant, the spouse receives a pension which is equal to the annuity. | Return of original purchase price to nominee. | The payout is less because of the return of purchase price option. |
| JOINT LIFE, LAST SURVIVOR ANNUITY, NO RETURN OF PURCHASE PRICE | After the annuitant’s death, the spouse receives a pension equal to the annuity paid to the former. | Income for as long as you and joint annuitant live; flexibility to fix the second annuitant’s income. | No payment to beneficiary after death of both annuitants; payout is lesser than a single life annuity. |
| INCREASING ANNUITY | Annuity is paid as long as the annuitant is alive. The amount increases every year at a simple rate, starting at 3% p.a. | Good for those who have not factored in inflation and need an increasing annuity with each passing year. | It costs more because it is an increasing annuity. |
| The annuity payout options are six of the popular ones offered by insurers who are currently the only annuity players. The purchase price (return of purchase price) refers to the value of your investment corpus at the end of the accumulation phase with which the annuity was purchased. | |||
Retirement Planning Checklist
Once You Retire
