Diversified income strategy
Also written Diversified retirement income · Income diversification in retirement
Combining several sources of retirement income — pension, annuity, government schemes, bonds and mutual funds — so no single source has to carry the whole burden of meeting a retiree's different needs.
In plain language
No single investment does everything a retiree needs. Some pay income for life but very little of it. Some grow money well but pay no income at all. Relying on just one source to cover every kind of retirement expense wastes the strengths of the others.
A diversified income strategy brings several income sources together, each doing the job it is best suited for.
How it works
The workbook's guidance for building the income portfolio:
- Earmark guaranteed payouts — pension and annuity — only for mandatory and essential expenses such as taxes, insurance and basic living costs, because annuity is a low-yield product and should not be over-used.
- Use POMIS, SCSS, bank deposits and rental income (if any) for the next tier of regular expenses.
- Use bonds and debentures to accumulate funds for medium-term goals, such as travel in retirement.
- Use mutual funds to bring growth into the portfolio, with the portion of the corpus not immediately needed for income.
- Defer annuity payments to the middle and later retirement years, particularly if a second career or other income supports the early years.
No single combination suits every retiree — the workbook is explicit that income security for life is the top priority for most, but the weight given to other features (flexibility, growth, inflation protection) varies, and the mix should also reflect the retiree's own skill and comfort operating each product.
A worked example
Mr and Mrs Reddy retire with a combined corpus of Rs 1.2 crore and a government pension of Rs 25,000 a month covering part of their essential needs.
They structure a diversified income plan: the Rs 25,000 pension plus Rs 30 lakh in SCSS (near the scheme's Rs 30 lakh ceiling, held jointly across two accounts) cover mandatory and essential expenses. Rs 15 lakh in POMIS and bank deposits fund regular discretionary spending — travel, entertainment. Rs 20 lakh in bonds and debentures is earmarked for a planned home renovation in five years, a medium-term goal. The remaining Rs 55 lakh stays in mutual funds for growth, since it is not needed for immediate income.
They deliberately do not buy a large annuity at the outset. Because their SCSS and POMIS income already covers essential needs, they defer a bigger annuity purchase to their mid-seventies, when they expect their own management of the growth portfolio to become harder — following the workbook's guidance to push annuity purchase later rather than earlier.
Why NISM asks about it
Chapter 7, section 7.3 (Diversified Income Strategy), sits immediately before the Bucket Strategy section and lays out the product-matching logic that the bucket strategy then formalises around time horizons. Expect a scenario question asking which product should fund which category of retirement expense.
Common exam traps
- Annuity should be limited to essential expenses, precisely because of its low yield — using it to fund discretionary spending wastes its main strength (guaranteed income) on needs that do not require that guarantee.
- Deferring the annuity works best when another income source, such as a second career, covers the early years — deferring it with no substitute income source can leave a gap.
- There is no single "right" combination — the workbook explicitly says the mix depends on the retiree's priorities and their own comfort managing each product, so a scenario answer should match the client's stated circumstances, not a memorised universal split.
Check yourself
1.Under the workbook's diversified income strategy, what are investments in bonds and debentures suggested for?
- a)Meeting mandatory and essential expenses such as taxes, insurance and living costs
- b)Accumulating funds for medium-term goals such as travel in retirement
- c)Meeting the next category of regular expenses after essential ones
- d)Bringing growth to the portfolio with the portion of the corpus not immediately required
Show the answer
Answer: (b) Accumulating funds for medium-term goals such as travel in retirement
The workbook's guide to constructing income streams:
Source Use Guaranteed payouts — pension and annuity Mandatory and essential expenses such as taxes, insurance and living costs (limit annuity to these, as it is low yield) POMIS, SCSS, bank deposits, rental income The next category of regular expenses Bonds and debentures "To accumulate funds for MEDIUM TERM GOALS SUCH AS TRAVEL in retirement" Mutual funds Growth, with the portion of the corpus not immediately required Annuity payments Defer to the middle and later years when not supported by a second career Each wrong option is the use the workbook assigns to a different source — annuity/pension, the government schemes and deposits, and mutual funds respectively. The guiding idea: "relying on only one source may not be the most efficient use of the accumulated corpus."
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- Post Office Monthly Income SchemeA five-year, government-guaranteed post office deposit paying interest every month, with a Rs 1,500 minimum, a Rs 9 lakh single or Rs 15 lakh joint maximum, and no tax benefits.
- Annuity finalityThe rule that once an annuity is bought, it is locked in for good — the principal cannot be redeemed and the type of annuity chosen cannot be changed.
- Bracket managementUsing tax-free or tax-adjusted income in retirement to stop taxable income from crossing into the next, higher income-tax slab.
- Bucket strategyA retirement income plan that splits the corpus into three buckets by time horizon — near-term cash, medium-term income assets, long-term growth — so a downturn never forces a sale of risky assets for near-term spending.
- Senior Citizens Saving SchemeA five-year, government-guaranteed deposit for those aged 60 or above, capped at Rs 30 lakh across accounts, paying interest every quarter at a rate the government announces quarterly.
- Staggering income investmentsBuying income-generating retirement products in tranches over time, instead of committing the whole retirement corpus at once, so a retiree is not locked into one interest-rate environment for life.
- Profit booking in the bucketsA maintenance rule inside the bucket strategy: set a target return on the riskier buckets, and whenever it is beaten, move the excess down into a safer bucket rather than letting it ride.