How important is additional income source planning?

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Amidst limited pension and rising inflation, 70-year old Paramjeet (name changed) was finding it extremely difficult to make ends meet with just Rs 26,000 per month. The amount barely covered his medicines and treatment costs, let alone taking care of his daily expenses.

He regretted not creating income sources for his retirement while he had a job. Don’t make the same mistake like Paramjeet. Don’t rely solely on your pension. Salaried individuals should plan for alternative sources as well. This is known as passive income, which can be achieved via one’s property, mutual funds, or other assets.

Retirement planning advisor Sanjeev Dawar notes that ideally, one should start planning for their passive income sources for their retirement as early as possible. This is essentially to reap the benefits of compounding. This way, not only will you keep earning returns on your principal investment, but interest will also keep compounding and adding to your corpus. The aim of passive income is to ensure that even when a stable income flow stops, a certain amount continues to come in regularly.

Imagine this. If you start investing for your retirement at the age of 40, you will need to put aside Rs 20,000 every month to accumulate a corpus of Rs 2 crore. However, delaying by just 5 years, the amount you need to set aside every month to reach the same target will double to Rs 40,000.

Experts suggest that in order to be able to retire comfortably, a corpus 25 times your annual expenses should suffice. Your NPS corpus can help you in this. Start investing in your NPS regularly. Once you turn 60, about 40% of your corpus has to compulsorily go towards buying an annuity plan, which lets you avail regular payouts for a fixed period, or as long as you live.

But the remaining 60% of your corpus, which can be withdrawn as a lump sum upon turning 60, can be invested in mutual funds, through which funds can be periodically taken out via a systematic withdrawal plan, or SWP, to maintain regular income inflow.

Dawar suggests investing the same in both balanced advantage funds, with some portion allocated for aggressive hybrid funds. Balanced advantage funds can help you avail the benefits of both equity and debt. As per data from Value Research, balanced advantage funds have delivered 10.48% and 9.02% returns over a 3 and 5-year period respectively.

You can also consider adding dividend yielding stocks to your portfolio. The regular dividend payouts will not just add up to a steady source of income, but reinvesting these dividends will help you increase your corpus. Dividends are usually doled out by blue-chip companies which are financially strong and reputed in the market, capable of withstanding market risks.

Alternatively, if you want to stay away from stocks, you can opt for investing in dividend-yielding mutual funds. Data from Value Research indicates that dividend-yield mutual funds have generated a healthy 23.77% returns over a 3-year period, and 17.97% returns over a 5-year period.

Dawar notes that apart from investing the corpus suitably, it’s also necessary to bring down your annual withdrawals and increase reinvestments, so that your returns always outpace your withdrawals.

Many of us buy properties with the intent of renting and earning from it. But finding, managing a tenant and property’s upkeep can be hassling. So, if you’ve missed out on starting early for investing for your retirement, but have a property to your name, you can opt for reverse mortgaging.

In a home loan, the bank lends you a lump sum amount, the repayment of which is made in monthly installments. But in reverse mortgaging, you can use your property as a collateral and earn from the bank via periodic interest payments. Such loans work via mortgaging the property with the bank, and earning some amount periodically as interest.

Such loans are offered by all prominent Indian banks and are exclusively available to those aged 60 or more. You need not repay this loan back, nor do you need to move out of your property during the loan period. What’s more, these monthly payouts are tax-exempt. If your family wants to take back ownership of this property, they can repay this loan, along with interest, and claim back the possession. Otherwise, the bank will sell off your property to get back the outstanding loan amount. And if there is any amount left post this, the bank gives the same to the heir of the property owner.

Well, these are some ways through which you can generate a passive income.