Retiring Shortly? Invest In Debt Mutual Funds And Start A SWP

When you design your retirement plan, first and foremost, you’ll want to make sure your day-to-day expenses— non-negotiable costs, such as housing, food, utilities, taxes, and health care— are covered by guaranteed income sources.

- Mukesh Ranjan

You need to carefully research investment options and choose ones that match your goals. It’s important to manage taxes on your investments too. You’ll need to determine the relative importance of growth potential, guarantees, or flexibility to help you pinpoint the strategy that is right for you in retirement planning. The biggest challenge for retirees is make their retirement savings last a lifetime that too when interest rates of fixed income instruments have come down drastically.

Many would suggest equities as an alternative, but if bought at the wrong time and at the wrong price, equities have the potential to churn out big losses that the portfolio may find very difficult to recover from. For a retiree who depends solely on income from his investments, even a small loss can be quite disconcerting. They need to invest in those market-linked instruments that offer higher returns than traditional fixed income savings instruments while being more tax-efficient than fixed deposits and small savings schemes.

A Systematic Withdrawal Plan in Debt mutual funds is the best option for a retiree to get regular cash flows. These funds offer comparatively safe and steady returns and coupled with the SWP strategy, give the most tax-efficient returns as compared to most fixed-income investments. Gains from debt mutual funds are taxed at a lower rate of 20 percent (with indexation benefit) or 10% (without indexation), if held for more than three years. Since SWP withdrawals are a mix of the principal amount and profits, the effective tax on the withdrawn amount is very low as only the profit portion is charged to tax.