Retirement is the time to unwind and enjoy life in a leisurely fashion. However, to live a comfortable retirement life and enjoy the simple pleasures of life, one needs to prepare financially. With no steady income to rely on, the quality of your retirement life will depend on the financial decisions to make today.
For many, planning for an unknown future is a difficult task. Moreover, the revolution in medical science and improved quality of life has increased the average life expectancy of people. People are living longer and more lavish lives. Thus, retirement planning has become more complex. In the absence of a dedicated retirement benefit system, this is especially true for investors in India. Investors need to look at multiple avenues to help them build an adequate savings pool for their retirement. One such avenue that every smart investor should include in their retirement strategy is bonds.
Why Should you Include Bonds in Your Retirement Portfolio?
Bonds are investment instruments that represent funds an investor has lent to corporations or government bodies in exchange for a premium. Bonds extend a fixed rate of return regularly till they mature. On maturity, the principal invested is returned. This feature makes bonds predictable and an avenue of a steady income generation. It is imperative to add such an element of predictability to a retirement portfolio.
The fraction of investment in bonds in a retirement portfolio depends on various factors like;
- Your current age and expected retirement age.
- Other anticipated sources of income during retirement.
- Your risk appetite.
- Your anticipated areas of expenditure during retirement. For instance, you will have to think about whether you are only saving for living expenses or more expenses such as a child’s education.
If you are still in your early working years and accumulating assets, your investment horizon allows for more risk. A combination of stocks and bonds will allow you to ride through the ups and downs of the stock market while ensuring a great degree of predictable returns. For investors close to retirement, protection against deep market corrections is crucial. Hence, bonds with their steady income-generating potential are the way to go.
Some Prudent Questions to Ask Oneself Before Retirement Planning
- How many years until you retire?
- Number of dependent individuals?
- Possible sources of Income and the amounts from the current one?
- Accounting for Inflation
- How much risk am I willing to take?
Advantages of Bonds Investment in Retirement Planning
1. Safe and Secure Investment
Bonds represent the debt segment of investing. Debt instruments are considered to be relatively safer than equity. This is primarily for two reasons. Government bonds represent the ultimate haven for your funds as they have the sovereign’s commitment towards interest and principal payment. Moreover, in the event of a company liquidating, debtholders have a higher claim and priority over shareholders.
2. A Steady Income Stream
Bonds offer a steady stream of income via regular interest payments. They are higher paying and available with various options compared to Fixed Deposits. Moreover, the interest rate of bonds reflects the macroeconomic situation. Hence, higher inflation and a growing economy will also usually have higher bond yields.
Apart from predictability, various bonds can be traded in the market for capital gains as well. For instance, if your retirement portfolio consisted only of stocks, then a bear market close to retirement would put you in an unfavorable financial position. With bonds, a retiree can confidently predict their income in their retirement years.
3. Protection Against Equity Risk
Financial advisors time and again emphasis the importance of a diversified portfolio. Bonds investment can help you earn better risk-adjusted returns as it can help you tide over a decline in the stock market. If you are closer to retirement, a higher fraction in your portfolio should go towards bonds investment to benefit from higher predictability.
4. Capital Preservation
The principal invested is returned to the investor once the bond matures, making it an excellent tool for capital preservation. This is crucial for retirement planning as the money invested in your working days is the safety net of your income-less days. Thus, any capital loss is detrimental to a comfortable retirement life.
5. Tax Benefits in Bonds Savings
It is vital to invest in tax-saving instruments to prevent your income from depleting further due to taxes. Tax-free and tax-saving bonds are a great way to reduce your tax bill on retirement.
- While tax-savings bonds offer tax benefits, Interest income from tax-free bonds is exempt from taxes under section 10 (15) (iv) (h) of the Income Tax Act of 1961.
- Tax-saving bonds have special privileges under section 80CCF, which offers deductions up to Rs 20,000 per year. Furthermore, these bonds offer deductions up to Rs 1.5 lakhs under section 80C of the income tax act.
- Tax-saving bonds require a minimum 5-year lock-in period. Tax-free bonds have a maturity of up to 20 years and are devoid of a minimum lock-in period.
Which are the tax-saving and tax-free bonds available for investment in retirement planning?
- 75% Savings Bond by the government of India
- Sovereign Gold Bond (SGB)
- Capital Gains Bonds by NHAI – National Highways Authority of India
- Capital Gains Bonds by REC- Rural Electrification Corporation Limited
- Tax-free bonds by Indian Railways Finance Corporation (IRFC)
- 76% tax-free bond by HUDCO – Housing & Urban Development Corporation
- 74% tax-free bond by NABARD – the National bank for agriculture and rural development
- 92% tax-free NCD by PFC- Power finance corporation
- 91% tax-free NCD by IIFCL- India infrastructure finance company ltd
Annuity Plans VS Bonds
Annuity or retirement plans are investment plans wherein an investor receives lump-sum or periodic payments for a lifetime. The investor can choose between a fixed, immediate, or deferred annuity plan. In a fixed annuity plan, the annuity payout amount and the tenure are fixed. Thus, the annuity is paid to a nominee after the beneficiary’s demise. The annuity is paid immediately after the investment in an immediate plan. While in a deferred plan, the payout is given after a predetermined period.
- Annuity plans suffer from the problem of inflexibility wherein there is no scope for premature full or partial withdrawal. Hence, annuity plans are not dependable in case of urgent expenses. Some plans allow premature withdrawal but they come with hefty fines and penalties. Bonds on the other hand can be sold in the secondary market.
- The returns from annuity plans are lower than the returns on bonds.
- High purchase costs, sales, and management fees make annuity plans inferior to bonds.
- The payouts from annuity plans are taxable. Tax-saving and tax-free bonds are great ways to lower your tax bills.
- Higher returns can be earned by choosing riskier plans. The payouts from low-risk plans may not suffice your living expenses during retirement. Bonds offer attractive interest rates and are considered to be safe investments, especially government bonds and corporate bonds with high ratings.
Benefits of Bonds in Retirement Planning – A Snapshot
- Stability – reduce your investment risk by diversifying between bonds and stocks.
- Higher returns – Bonds often extend returns higher than traditional venues like fixed deposits and annuity plans.
- Security – Backed by government entities and reputed corporate bodies.
- Stable income stream – Get regular interest payments in your retirement.
- Tax savings – Save taxes with tax-free and tax-saving bonds.
- Tradeable – In event of an urgent cash requirement, bonds can be sold in the secondary market.
How Can you Buy Bonds Online in India?
Like stocks, bonds are issued in the primary market and traded in the secondary market. Due to the recent internet revolution, investing in bonds has become more simplified. There are several ways through which investors can invest in bonds in the secondary market.
- One such way is through the online facilities of brokers. Several brokers today have launched web pages and apps through which investors can buy and sell bonds.
- Investing in government bonds can be done through the RBI’s retail direct scheme. Moreover, BSE and NSE also have apps for bond trading.
- New investors can invest in various bonds like corporate bonds, T-bills, and government securities through debt or hybrid mutual funds.
- One way of online bond investment that is gaining a lot of traction because of convenience and serviceability is online bond platforms like Bondindia. Investors can complete the entire process of opening a trading account online, from KYC to seeding your bank account. Trading can be done anywhere and anytime and through secure transaction systems. Bonds India offers government securities of various maturities, tax-saving/free bonds, AAA-rated corporate bonds, and other fixed-income instruments on one platform.
It’s never too late to start retirement planning. Though it could be a daunting task, creating the best retirement portfolio will depend on your age, expenses, and risk appetite. The one rule that has survived the test of time is to diversify. Bonds ensure diversification, security, and a stable income stream in your golden retirement years. The tax-saving features, moreover, make bond investment perfect for retired individuals. Bond platforms have made trading in bonds hassle-free, swift, and accessible to all investors – young and older alike.