The word 'Retirement' may click relaxed life, no 9 to 5 struggle & enhanced social life to many minds. Yes ..It's true but there is other side to the coin as well. That is, no fixed income, increased medical expenses & a bug of Inflation eating the value of existing corpus.
The proper steps taken at early age to create a sufficient corpus which will fund all the financial needs till death is a Retirement Planning process.
There are practically two stages in later life. Following are the typical goals with expected financial actions.
Now the major task is to decide the required Retirement corpus.
1.Estamte monthly household expenses. Add yearly expenses like House Tax, Insurance etc.
2.Consider the average inflation to be 6%
3.Calculate the Future Value of expenses.
4.An extra 5 – 10% of the estimated expense can be added to it as a precaution.
5.Apart from your living expenses, it is highly recommended for retired individuals to hold Health Insurance and an Emergency Fund.
This exercise will lead you to the approximate Retirement Corpus required.
Now to accumulate this amount you can refer to asset allocation chart given in our earlier blog Sowing MoneyPlant.
The retirement corpus configuration involves three stages –
- Consolidating the retirement corpus - All the retirement benefits, investments etc.
- Estimating life-expectancy - Depending on genetic information & existing health conditions.
- Estimating Regular expenses - As per changed lifestyle & adding medical expenses.
Now the important part is to manage this Retirement corpus for -
i. Income Generation in Retirement: To meet monthly expenses. Following are the typical options.
| FIXED INCOME SCHEME | LIC Varishtha Pension Bima Yojana | Fixed Deposit | Senior Citizen Savings Scheme | Post office Time Deposit | Debt mutual funds |
|---|
| Rate of interest | 8% | 6 – 8% | 8.5% | 7 – 8% | 7 – 8% |
|---|
| Investment tenure | 15 years | 7 days – 10 years | 1 – 5 years | 1 – 5 years | 91 days – 5 years |
|---|
| Lock-in period | 15 years | Same as tenure | 5 years | Same as tenure | Same as tenure |
|---|
| Minimum investment | Rs 63,960 | Rs 1000 | Rs 1000 | Rs 200 | Rs 500 |
|---|
| Maximum investment | Rs 6,39,610 | Rs 15,00,000 | Rs 15,00,000 | – | – |
|---|
| Penalty on premature withdrawal | 2% | Interest rate is reduced by 1% from the original | 1-1.5% | According to the scheme | 1 – 3% |
|---|
| Tax status | Taxable for income generated | Taxable for income more than 3 lakh | Taxable for income more than 1.5 lakh | Taxable for income more than 50,000 | 20% for >3years.
As per slab for <3years |
|---|
| Recommendation | Can be considered | Can be avoided | Can be considered | Can be avoided | Can be considered |
|---|
ii. Retirement Corpus Protection : As we know INFLATION is a big enemy of retirement corpus, we suggest to use a mix of fixed-income and equity investment in an optimal ratio to protect the real value of your corpus. The 70:30 (debt: equity) ratio is considered as the minimal risk ratio of investment to fight inflation. Debt portion will provide protection & Equity will help growth.
iii. Retirement Corpus Growth: The gains from equity will be added to your capital investment in fixed-income which will increase the size of your corpus. The Balanced Fund Category of Mutual Funds give you ready mix of DEBT & EQUITY.
One more important aspect to ensure at this stage is to add Nominations to every asset so that the transmission to beneficiary becomes smooth.
Hope this information will make golden years of at least few readers tension free & Enjoyable.
If you need any help creating long term MF Portfolio, pl write to info@tradehint.co.in
Good Luck..
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