Plan your Retirement Pension Fund
After you retire from your normal work life, the regular flow of income stops. But the expenses drop marginally. With inflation hovering at an average of 8% and the cost of basic essentials increasing every other day, your savings as of today might not be sufficient to take care of all your expenses after you retire. It is therefore important that you start saving early and in a planned manner and determine your goal for the retirement corpus at an early stage.
Structure your own pension plan and take control of your retirement planning. All you need is to remember the following points while making your own pension plan:
Determine the amount you shall be comfortable as on today. Then calculate the future value of such amount on the day you want your pension to start. The future value shall take into account a reasonable inflation rate and a room of error. For example if you are age 35, plan to retire at an age 60, wants a pension of Rs. 50,000 at today’s value and assuming the average inflation to be in the range of 8%, then you require a pension amount of Rs. 3,42,425 at the start of your retirement period. Of course you need to further take care of the inflation at that time as well, and keep on increasing your pension amount every year.
On the basis of the above calculation, you need to arrive at the corpus you need at the time of your retirement from which you shall take out your pension at a regular period. Arrive at a real rate of return, that shall take care of the inflation and the return on investments, for the period you expect a normal healthy person may live.
In order to reach your target corpus amount, you need to plan your investments wisely and assume a realistic rate of return on such investments. Assuming you need a corpus of Rs. 2 crore as a corpus amount at the time of your retirement after 25 years, and you further assume a rate of return at 14% on your investments, then you need to invest around Rs. 1,10,000 every year to achieve the target corpus.
Plan your investments and diversify your portfolio according to your risk appetite. Use an optimal combination of Debt, large and mid cap equity and mutual funds, liquid funds and precious metal. NPS is one option you may include in overall strategy of your retirement planning. The optimal mix of investment depends on person to person, their risk appetite and age. It is recommended that you must include a higher percentage of large and mid cap equity in your portfolio if you are young and have 20-25 years before you retire.
For debt, you can look at long term debt funds, that stand to gain if the rates go down. Besides you can look at long term bank FD’s, recurring deposits and PPF. If you can, you must increase your voluntary contribution towards provident fund.
For equity have a right mix of bluechip companies, large cap mutual funds and mid cap mutual funds.
Remember Taxes and limitations
Remember that returns on your regular pension plan will be taxable. Thus you will get lesser than what you expect. Similarly pure debt funds also attract the tax liability, while profit in pure equity funds held over a year will be tax free. Also, you shall be able to withdraw only 1/3rd tax free from your regular pension policy at the time of its maturity and rest has to be necessarily converted into taxable annuity.
Revisit your portfolio at regular intervals. See if you are achieving the desired results from your investments and whether you need to recalculate desired annuity and target corpus. Explore the options of switching to products that are giving better yields in the same risk category. As you grow older you can reduce the exposure towards equity, especially mid cap. You may reduce equity exposure by 2 or more every year depending on your age, but do not completely remove equities from your portfolio even in the retirement age.
Do not stop investing. Have ECS mandate for your SIPs. Opt for voluntary provident fund deduction. Do not loose hope if your equity investments yield negative returns in a given year as you are invested for a long time and worked on an average rate of return for a set number of years.
Remember discipline is the key to any successful investment and in particular the retirement planning as it involves a longer than normal period.