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Tips to invest smartly for your retirement

Hemant Rustagi     February 13, 2015

One of the most important investment goals for every investor is to build a corpus that is sufficiently large to generate adequate income during his retirement. However, many of us often get overwhelmed by the thought of retirement and how to go about building a retirement corpus. No wonder, only a small section of investors plan for their retirement in the right manner. For the remaining, a combination of factors like failure to plan and investing in instruments that do not provide real rate of return makes it difficult to lead a happy retired life.  

The truth, however, is that one must plan for retirement as much ahead as possible. Remember, a carefully planned investment strategy not only goes a long way in helping you identify what you need to do in the present to lead a particular lifestyle after retirement, but also in avoiding pitfalls in your retirement. Your retirement plan should take into account factors such as when you plan to retire, the corpus you would require and the number of years you have to build it. Overall, the focus should be on saving as much as possible so that you can retire when you want and ensure that you do not outlive your money.

If you are one of those investors who has not yet started your investment process for retirement planning, you must act now. Although it pays to start investing early, it's never too late to do so. The important thing is to realise the importance of this goal in your life and make a commitment to follow a disciplined investment approach. The right way to make amends to the delay is to start investing now by ascertaining your time horizon and corpus required for retirement. Based on these two factors, you can work out how much you need to invest per month to achieve the desired corpus.

For example, if you are 40 years old and would like to have an income of, say, Rs 50,000 per month during your retirement, you will need to generate a corpus of at least Rs 1 crore to generate this income for you at the start of retirement. However, considering that your monthly expenses will keep on increasing every year on account of inflation, assuming an inflation rate of seven per cent, your expenses will increase by Rs 20,000 after five years, i.e., Rs 70,000 pm. In another five years, the monthly expenses will increase to Rs 98,000. As is evident, you will have to generate a tax-free income of around 10 per cent in the 10th year of retired life, which may compel you to take unwarranted risks on your retirement corpus.

A situation like this can cause distress and hence needs to be avoided. Therefore, you must aim to create a corpus of Rs 2 crore over the next 20 years. Assuming an annualised return of 12 per cent, you need to make a monthly investment of Rs 22,000 through SIP in options like equity funds . If you are not in a position to invest this amount currently, you must begin with whatever amount you can. In fact, the right way would be to create a budget for your monthly expense and avoid certain discretionary expenses that may allow you to invest some more money than what you may think you can. Make sure that you continue this process, irrespective of the market conditions. Remember, being a long-term investor, you will benefit from the volatilities in the stock market as investments made during market downturns will bring your average cost down.  

The problem is that most young people do not think about retirement - mentally or financially. They need to realise that for every 10 years of delay in the start of their investment process, they will need to invest three times as much each month to catch up. Therefore, if you are young, don't be afraid to start investing even with small sums. Remember, smaller contributions made on a regular basis in a highly potential asset class like equity can produce fantastic results in the long run. Needless to say, the longer you keep your money invested, the more you benefit from power of compounding. Of course, to get the best you have to stick to the plan as ups and downs would all even out over the years.  

Don't make the mistake of withdrawing amounts during the process of building the retirement corpus. While at times it might become absolutely necessary to do so, making it a habit can prove very costly after retirement.

Selecting appropriate investment options holds the key to success for retirement planning. Investing too conservatively can seriously dent your chances of creating the required corpus. For a long-term investment objective like retirement planning, your portfolio must have a significant portion invested in equity and equity-oriented options. The presence of efficient investment options like mutual funds in the portfolio can help you a great deal.

Remember, investing in pension funds offered by mutual funds can go a long way in keeping you focused on this very important goal. Besides, you enjoy tax benefits at the time of investment under section 80 C. In addition, long-term capital gains on funds that invest 65 per cent or more in equities are tax-free. For debt-oriented funds, that is, funds that invest less than 65 per cent in equities, long-term capital gains are taxed at 20 per cent after providing for indexation. Overall, these funds score over pension plans offered by insurance companies as well as NPS.

Currently, there are three such funds on offer from mutual funds - Templeton India Pension Plan, UTI Retirement Benefit Pension Fund and Reliance Pension Fund. Out of these, Reliance Pension Fund offers a Wealth Creation Option that allows investors to invest between 65 and 100 per cent in equities. The fund also has an income generation option that invests up to 30 per cent in equities and the rest is invested in debt instruments. The funds offered by UTI and Templeton invest up to 40 per cent in equities and the rest in debt instruments. You can select a fund based on your asset allocation, which should ideally depend upon how much time you have before you retire.

Unfortunately, many investors in our country continue to invest a significant part of their investments for retirement planning into traditional options like EPF, PPF, bonds, etc. They do so because they do not want to risk their capital. While it is all right to be worried about the safety of the capital, putting too much emphasis on it exposes them to another bigger risk, which is inability to beat inflation. Therefore, during the accumulation phase, the focus should be on "growth".

Investors also err while making their post-retirement investments for generating regular income. They invest predominantly in instruments offering guaranteed returns like Monthly Income Scheme of post office, Senior Citizen Savings Scheme as well as bank fixed deposits and hence often struggle to keep pace with inflation. It's important to invest a part of the corpus in equities and equity-related instruments even after retirement. Considering that the life expectancy in our country has been rising, it is a must. However, the exact asset allocation should be based on the corpus size, income requirement and financial liabilities.


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