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Retirement Planning
What is Retirement Planning ?

The best years of 'Life' ought to be your retirement years. You have worked hard all your life, and you deserve the best things in life in these golden years.

Retirement planning helps you set-aside money in your prime years when are generating income and enjoy a healthy lump sum or a steady income in your retirement years. It helps you avoid a dramatic hit to your lifestyle post retirement and provides financial protection to your dependents.

 

Your retirement plan should takes into account the following

Inflation

It can erode the value of money. Hence, it is essential that your retirement  investment is planned to make your returns inflation proof

Greater life expectancy

With overall life expectancy increasing, you need to plan for increased number of years post your retirement

Medical emergencies Increase in age, necessitates sufficient provisions for increased medical emergencies
Personal financial goals

While determining your personal financial goals, it is essential to take into future changes in your expense patterns

 

There are several retirement policies, under which you can choose the age at which you wish to retire, and the premium you invest towards your retirement. These policies help you achieve your retirement goal by providing you with significant tax benefits and appreciated capital at your chosen age of retirement.

What is the importance of Retirement Plan ?

All of us are living longer than our forefathers. It's absolutely essential to have enough money for old age. Due to increase in the cost of health care and longevity - you need more money for long term than in short term. When you are young you will have lesser income and lesser savings. When you reach middle age, you will have higher income and higher savings. As you grow older, you will have perhaps no income and only your savings saved throughout your earning period will come to your rescue.

Life insurance like pensions and provident fund locks up your savings like in a bank vault and prevents you from withdrawing for your short term consumption needs. A retirement plan helps you set aside money in your prime years when you are generating income and enjoy a healthy lump sum or a steady income in your retirement years.

A good retirement plan takes into consideration various factors like:

1. No. of years to retirement and the no. of years in retirement
2. Your current risk profile
3. Your financial goals and objectives post-retirement
4. Achieves a healthy diversification across asset classes

What should you start planning for your retirement right away ?

There is no right age to start savings for your retirement. The earlier and more consistent you are, the better will be your saving in the long run. There is always a substantial difference in the wealth of people who start saving early through a systematic financial plan as compared to those who delay.

Let's look at an example:

Both Ajay and Vijay want to retire at the age of 60 years.

Ajay invests Rs. 50,000 towards his retirement corpus while Vijay invests a total of Rs. 1,00,000 . However, inspite of investing less, Ajay accumulates Rs. 1.49 crore, compared to Vijay's accumulation of Rs. 1.01 crore!

What is an Annuity Plan ?

An Annuity is a series of payments that an insurance company promises to pay you for a fixed period of time usually throughout your life. You, the person receiving the payments, is called the 'annuitant'.


How can mutual funds help?

  • Long term capital appreciation:

  • Various Schemes

  • Systematic Investment Plan (SIP)

  • Ability to Switch

  • Income through Systematic Withdrawal Plan (SWP)

  • Flexibility to Redeem lump sum amounts

  • Pitfalls

SAVE FOR RETIREMENT WITH EASE

1.Why saving for retirement is important

2.Investing in realty has both pros and cons

3.How to select a retirement plan

4.Mutual Funds best for building retirement kitty

5.How to choose best insurance cover for retirement

6.Reverse mortgage house for regular income

7.Tips to buy property for retirement years

8.Incentives needed for pension schemes

9.Make hobby your career in post-retirement

It's a question that has foxed financial planners for ever - how to beat inflation and generate the desired wealth over long periods.

Inflation, we know, can upset calculations by eroding the value of savings. At 5% inflation, an expense of Rs 10,000 will become Rs 40,000 in 30 years. For a person saving for retirement, generating returns that can beat inflation seems difficult. It's not, provided he invests wisely in mutual funds.

Note: The assumption is that both investments appreciate at the rate of 10% p.a.

What Ajay had in his favor  was time! He began investing a sum of Rs. 50,000 p.a., at the age of 25 years. Vijay on the other hand, saved Rs. 1,00,00 every year from the age of 35.

Remember, more than the amount saved it is the rhythm of savings that helps you realize your dreams faster.

While income, expense, investments and liabilities form the four pillars of any financial plan, its success actually depends on the ability to manage these well. This is where Life Insurance forms a critical part of any financial plan. Life insurance is a long term product that provides you the benefit of compounding while ensuring that your loved ones are taken care off.

Inflation is the rate at which the general level of prices for goods and services rises. This erodes the purchasing power of your money. This effectively means that with Rs.100 today, you will be able to purchase more goods than with Rs.100 after 10 years.

With inflation rising continuously, how do we ensure that we have sufficient money to fulfill our dreams? The answer is clear through regular and systematic savings.


How to select a retirement plan

For a long time, retirement planning meant investing in small saving schemes like the Public Provident Fund (PPF), the National Saving Certificate Scheme and the Employee Provident Fund (EPF). Some also bought traditional insurance policies. However, the problem was that these seldom beat inflation. Then came mutual funds in 1964, when UTI was launched, but these were seldom used for retirement planning. Things picked up slightly from 1993 with the advent of private sector mutual funds. Now, they are changing fast.

Know yourself
Before investing, there are some questions you need to ask yourself. How many years are left for your retirement? How much money will you need at retirement? What is your risk-taking ability? What is the monthly income you will need to sustain your current lifestyle? Once you have answered these, planning becomes simple. No matter what your investment horizon is, no matter what your risk-taking ability is, no matter how much your investment is, there are mutual fund products for every need.

How to choose best insurance cover for retirement

You can invest in equity funds for capital appreciation, debt funds for regular income or gold funds for securing your future. In terms of risk, not only can you choose funds which are safe (liquid funds), you can also invest in funds that are highly risky (sectoral funds), or hybrid funds, which invest in both equity and debt and are moderately risky. says apart from versatility and convenience, mutual funds are the lowest cost options for wealth creation when compared to unit-linked insurance plans and structured products.

Time it right

Building a corpus for retirement is most likely your last goal after others such as child's education or buying a home. This means you have more time to plan and invest for retirement.
This, experts say, is why equity schemes are the best vehicles to build a retirement corpus.large-cap and blend-cap (which invest across market caps) funds can be used.
"In fact, over long tenures, most equity risks are ironed out. Also, equity as an asset class tends to be adequately hedged against inflation, the biggest risk in the long run.
Although the choice between blue-chip and mid-cap or sectoral schemes depends on your risk profile, well-diversified equity and index schemes to begin with.
The choice of fund depends on your objective and risk-taking ability. Each asset offers funds that enable you to meet specific goals. While planning, take help from a financial advisor to decide the asset allocation. Pick funds that have a good record, performance and lineage. Stick to funds that are simple to understand.

Starting out
Equity funds are ideal during accumulation/earning years as equities tend to outperform most assets over long periods. A simple way to start is to invest in a systematic investment plan (SIP) of an equity mutual fund. SIPs smoothen unpredictable market movements by accumulating more units when the markets fall. You should start moving towards debt when your retirement is 5 years away by investing 20% corpus each year in debt instruments. You can use a Systematic Transfer Plan for this. The idea is to reduce risk and build the debt portfolio, which will give consistent income after retirement with little or no loss of capital.

The retirement corpus should not be rebalanced unless there is any significant change in the expected performance of a fund due to the fund manager leaving, change in the fund mandate, acquisition of the asset management company, etc", says Experts. Mutual fund portfolios can be rebalanced without costs. Such a review is advisable as it helps reassess performance and realign strategy if there is an important market development or a change in asset allocation.


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