The need for a proper financial plan to build a retirement corpus for an individual has only gained in importance in recent times.

Retirement Planning: Building a golden nest

Is your retirement plan on track?

 Jinsy Mathew   

According to the United Nations World Population Prospects, India's 60-plus population is expected to reach 323 million by 2050 - a number greater than the US population of 2012. And given the changing social landscape, moving away from joint family set-ups to nuclear families, making arrangements to support one's sunset years is becoming increasingly important. However, building a nest egg has always taken a back seat for the Indian middle class, although most of them plan to catch up with the niceties of life post retirement. Says Sudipto Roy, Managing Director, Principal Retirement Advisors: "Pension policies are still a push product in India due to lack of awareness and expectations of individuals that their children will take care of them after retirement. This keeps them away from planning early.

Getting it Right

But what's the right time to start planning for your retirement? Well, it's never too early, especially in times of increased life expectancy and more effective ways to prevent, diagnose, and treat diseases and conditions of aging. And to ensure a smooth flow of cash during your sunset years you will need to harness the power of compounding - save regularly and over the long term.

Asset Allocation

Like any other aspects of financial planning, asset allocation is key to planning for your golden years, too. Getting to know the tools that would help your money grow is key. Whether it be debt and equity, life and health insurance, or real estate, faulty asset allocation is a not only dangerous but can prove to be harmful in the long run, says Roy.

Going overboard on any single asset class should be strictly avoided as these are long-term plans. Historically, it has been observed that there are periods when a certain asset class tends to outperform other asset classes. So, have a healthy mix of assets to register robust growth.

Know Your Product: Debt

Public Provident Fund.

PPF is one of the most popular fixed income products for long-term savings. Its Exempt Exempt Exempt (EEE) tax status and high interest rate make it an even more attractive tool. The recent decision of the government to revise the rates on a quarterly basis from the earlier annual cycle, and a cut in interest rates from 8.7 per cent to 8.1 per cent is not a deterrent either. Says Ankur Kapur, founder, Ankur Kapur Advisory: "PPF is still attractive as there is still a mark-up on the benchmark government securities. However, going forward, this gap is bound to reduce. Therefore, one cannot solely depend on PPF to build a retirement corpus.

However, liquidity has always been a concern. The product comes with a lock-in period of 15 years that can be extended in blocks of five years. One can, however, take a loan against the accumulated corpus or make partial withdrawals from the seventh financial year. What makes it still attractive, is its post-tax yield.

Employees' Provident Fund.

EPF is yet another option to build long-term wealth with EEE tax status. The employee contributes 12 per cent of his or her basic salary, with the employer contributing an equal amount to the fund - 3.7 per cent of the employer's contribution goes towards the EPF component, while 8.33 per cent, or a maximum of Rs1,250, is allocated to the Employees' Pension Scheme.

The government has recently made some changes to the EPF rules as well. The retirement age has been increased from 55 to 58 years and the employee could withdraw a part of the money accrued through the employee's contribution plus interest, in case of medical emergencies, purchase of a house or for his child's wedding and education. On maturity (58 years), the applicant can withdraw the entire corpus.

Voluntary Provident Fund.

It is an extension of the EPF, wherein the employee can voluntarily contribute a percentage of his salary over and above the mandatory 12 per cent to the account. However, the employer is not obliged to match the employee's contribution and as long as the individual is employed, VPF cannot be withdrawn. Says Gajendra Kothari, Managing Director and CEO of Etica Wealth Management: "VPF should be chosen only if the investor is not ready to take on any other financial product. It is ideal for those who feel that they are not disciplined to save for retirement. In all other cases, EPF should suffice.

National Pension System.

This is a government scheme that lets you save money for retirement and gives exposure to one of the three asset classes - equity, government securities (G-Sec) and non-G-Sec fixed income instruments. NPS has primarily two options for the salaried class - Tier I or Tire II account. Tier I NPS is mandatory for all government employees and they must contribute 10 per cent of their basic salary along with their dearness allowance and dearness pay every month, with the government matching their contributions. Here, it is necessary to invest 80 per cent of your money in an annuity scheme - a plan that ensures income at regular intervals after retirement - with the Insurance Regulatory Development Authority (IRDA).

The withdrawal options for Tier I NPS are limited up to the age of 60. On maturity (60 years), you can withdraw 60 per cent of the accumulated corpus, while the remaining 40 per cent should be used to procure an annuity plan. Of the 60 per cent lump sum, 40 per cent is tax-free while the remaining is taxable as per the individual's tax bracket. However, if the 20 per cent is invested in an annuity it will also be tax-free, except in cases where tax liability arises on peension income.

Private sector employees can also opt for Tier I NPS with a minimum annual investment amount of Rs6,000. To invest in Tier II NPS, however, one has to first invest in a Tier I account and then invest the remaining amount, if any, in the Tier II account with a minimum contribution of Rs1,000 every quarter. You can withdraw your money from a Tier II NPS account any time without any penalty. However, Kothari believes that NPS is an option only for the financially savvy investor who can take advantage of both the lump sum and annuity benefit on retirement.

At present, annuity schemes can be brought from LIC, SBI Life Insurance, ICICI Prudential Life Insurance, HDFC Life Insurance and Star Union Dai-ichi.

Atal Pension Yojana.

Under APY, you receive a fixed pension of Rs1,000 to Rs5,000 per month after 60, depending on your contribution and age of joining the scheme. For instance, a 35-year-old will have to pay Rs902 a month for a pension of Rs5,000. The recently-launched scheme by the government is available to all bank account holders between 18 and 40 years. However, those who are covered under the statutory social security schemes, such as EPF, are not eligible for government contribution.


Know Your Product: Equity

Equity-Linked Savings scheme. ELSS is a type of mutual fund which comes with a three-year lock in period and tax benefits. Most ELSS plans invest 90 per cent in equity and the remaining in debt. One can start with a minimum contribution of Rs500 and have three options - growth, dividend and dividend reinvestment. Opt for an open-ended scheme with growth option to see your money grow at a fast clip.

In a close-ended scheme, after the completion of three-year lock-in, the scheme is liquidated irrespective of market conditions. But for an open-ended scheme, the investor has the option to continue with investments, giving him the option to average out the holding over a longer term and, thereby, compound the earnings.

Mutual Fund Retirement Plans. They are very similar to other mutual fund schemes. Says Ashok T. Kanawala, Head, Products, Training and Business Development, HDFC Mutual Fund: "In a normal mutual fund, investors are more likely to succumb to the emotions of greed and fear and that proves to be a challenge when it comes to retirement planning. When they invest in a retirement mutual fund, there is a goal in mind and it results in rationalising current spending and channelising savings to build a sizeable corpus.

At present, UTI, Franklin, HDFC and Reliance provide retirement MF plans. An applicant can start with one plan, say, equity, and then switch to others, such as hybrid equity or debt, as per one's needs. Each plan comes with a five-year lock-in and an exit load is levied if the funds are redeemed before 60. "The retirement MFs ensure that the investor remains invested in a disciplined manner over long durations without pecking into this accumulated corpus to meet the other necessities of life," says Kanawala.


Annuity Plans

An annuity is a pension product that offers steady cash through the retirement years on a lump sum investment. At present, only insurance companies provide annuity plans of different types - life-time income without capital refund, life-time income with capital refund, life-time income with incremental returns of 3-5 per cent, life-time income with certain income for 10-20 years, and joint annuity plans.

Even though annuities claim to render guaranteed pension for life, it would be prudent to check the returns offered by them. On an average, the returns are between 5-6 per cent, which is much lower than fixed deposit rates for senior citizens. Says Suresh Sadagopan, founder, Ladder7 Financial Advisories: "There are several factors which mar the choice of annuity - low returns, tax disadvantage, lack of liquidity and non-availability of loan against the accrued lump sum are some of the negative aspects."

But then why should you consider an annuity plan? Sadagopan says annuities work well for individuals who are extremely conservative and wants only stable income, more so, as no other products offer guarantee monthly income. However, annuities can be best avoided if an investor is ready to plan his or her retirement in the mid-30s, or at least by 40, by using a combination of products yielding higher post-tax returns. And, don't forget that pension is a taxable income.

Apart from annuity plans, pension plans are also available from insurance companies that allow you to invest for your retirement.

In a Nutshell

While there are multiple debt and equity products available in the market to plan for your sunset years, a lot depends on when you start to save for your retirement. It is necessary to keep the retirement corpus separate from your other important medium-term goals, including buying your dream home, or your children's wedding and education. "Often individuals start on a very positive note and follow the plan for two-three years. Thereafter, due to other reasons, retirement takes a back seat or sometimes is completely neglected. This is dangerous," says Sangeethasruthi S. of Ways to Wealth Consulting, adding: "The other worrying aspect is the use of retirement corpus to meet other necessities of life.

If an individual has an early start to retirement planning, equity should be first choice before it is cushioned by debt, say financial advisors. Though PPF, EPF and VPF are all EEE products do not amass your savings in these options alone. "A combination of PPF, EPF, and balanced mutual funds, if invested over 15-20 years, is good enough to build a comfortable retirement corpus," says Sadagopan. On maturity these products are all tax-free.


To create long-term wealth in the stock markets, it is best to take the equity mutual fund route - mutual funds are not only tax-efficient, but also help the portfolio to provide inflation-beating returns. However, one has to be careful when it comes to selecting funds. This is where a bit of due diligence is required. There are too many schemes in the market and parking the money in a wrong fund can prove to be disastrous. It is best to opt for a diversified fund from a respected fund house with a proven record. Do not fall prey to new schemes with fancy themes which keep coming once in a while to lure investors. And lastly, for those in the highest tax bracket, tax-free bonds are a good option as interests are tax-free.

Are You Insured?

"Buying a good life and health cover early on is a fair idea, but revaluation from time-to-time is necessary," says Anil Rego, CEO, Right Horizons Financial Services. For example, pure term plans are available till 75. The other important thing is to build a healthcare contingency fund apart from buying an adequate health insurance policy. "It is the daily expense of medicines along with health check-ups that form a dent to one's savings kitty because these are not covered under insurance," says Rego.


The Nest Egg

At 60, you may have a fairly sizable corpus. Now, it's necessary to allocate it in such a manner that investments remain safe but ensure regular income. Therefore, it is advisable to reduce exposure to equities as capital preservation and liquidity should be your main objectives. Here are some of the ideal investment options after retirement to generate a stable monthly income.

Fixed Deposits. Bank FDs have always been a favourite among senior citizens as they render safety and liquidity. Also, several banks offer an additional 0.5 per cent on FD rates for applicants above the age of 60. As on date, bank fixed deposit interest rates for senior citizens are between 8 per cent and 8.5 per cent. But given the recent slash in small saving schemes, experts say FD rates are expected to fall. Low deposit rates will allow banks to reduce their lending rates, which is needed to push credit demand in the country.

A company FD is yet another option. Even though there are only a few at any given time, in most cases they are attractively priced compared to banks. But there's credit risk with these products. So, do some due diligence before opting for company papers. As a thumb rule, opt for only those that are rated AA and above. Interests from both bank and company FDs are taxable.

Liquid Funds. They are an excellent option to park that extra money that one doesn't require immediately. In fact, it should be seen as an alternative to a bank's savings account. However, while banks provide 4 per cent on the money parked in a savings account, liquid funds give a return of 8 per cent. True, there are some market risks attached to them but you can redeem funds with a day's notice. The income generated from liquid funds is taxable as capital gains.

Senior Citizens' Savings Scheme. SCSS is one of the best risk-free investments. The minimum investment is Rs1,000 and the maximum is capped at Rs15 lakh. This comes with a lock-in of five years, but in case of an emergency the applicant can withdraw the amount by paying a penalty of 1.5 per cent before the completion of two years and 1 per cent after two years. Given an assured return of 8.6 per cent and tax-free interest income, this is one of the most attractive propositions.

Post Office Monthly Income Scheme. This is similar to SCSS. But the maximum investment limit for an individual is capped at Rs4.5 lakh and Rs9 lakh for joint accounts. It has a duration of five years and guarantees 7.8 per cent annualised returns that can be received on a monthly or quarterly basis. The interest earned is taxed as per one's tax slab.

Mutual Fund Monthly Income Plans. Given the increasing life expectancy, one cannot completely leave out equities. In such a scenario, monthly income plans are an attractive bet. Simply put, these are debt-oriented hybrid funds that provide regular income along with capital appreciation. Typically, fund houses invest 20-30 per cent of their portfolio in equities to bring in growth, while the remaining 70-80 per cent is invested in fixed-income securities. This ensures growth as well as returns. Also, liquidity is quite high. The dividend generated is paid to investors on a monthly, quarterly or half-yearly basis.

MIPs are, however, by far the most liquid. In case of emergencies one can exit before the completion of one year by paying an exit load of around 1 per cent. From a tax perspective, they are treated as a debt fund and, therefore, they are taxed at 20 per cent with indexation. On a one-year return basis, the top performing hybrid fund has given returns of 9 per cent.

Now that you know the products and how they work, get to work rightaway to start building your nest egg and secure your sunset years. After all, it's never too early.