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Almost all of us work hard. So it is natural to expect a stress free retired life. For that, you need a large pension corpus. However, building one is an exhaustive process that should start as soon as one starts earning. It also needs a bit of planning and some discipline.
Building such a corpus is mostly aimed at replacement of income. That is, the amount of money you need soon after you stop working, and thus stop earning. A corpus using the mutual fund route could be a smooth job. But in case of a pension plan, a slight uncomforting part is that even after building a large corpus, there remains a continuing challenge in managing the same since one is never sure how long he/she would need to live off that corpus.
According to industry officials, a pension plan should have the right blend of debt and equity to give reasonable return. The fund manager should not take undue risks. He should come up with the provision to pay regular income after the investor retires. Flexibility of investments and liquidity in case of emergencies are some of the additional features that could make a pension plan more attractive for the self employed and those from the unorganized sector.
"Migration of children, the collapse of the joint family system, increased life expectancy, health expenses, increased cost of living & spending patterns, and insufficient funds to sustain living standards are some of the factors which should be considered while planning for a retirement corpus.
Looking at the current economic scenario and consistently high inflation, one must design investments in such a manner that they will fetch enough returns to overcome future inflation.
So while building a retirement plan, the approach should be to make it gradually more conservative as one grows older. This is done to reduce the risk closer to retirement. Consider the example where you had a fund that is invested mostly in equity, and which had given a return of, say 15% over a 20-year period, and your corpus from that fund was about Rs 1 crore. Now, if your date of retirement was, say May 20, 2004, then on May 17 — in one session — sensex crashes 11.1%. So in that one day, your corpus in the fund went down by Rs 11.1 lakh, and you would be left with about Rs 89 lakh — a huge set back!
Although equity funds can witness such falls only once in a while, such things never happen with debt funds. So as you near the retirement age, it's prudent to shift to debt from equity.
If you have invested through the mutual fund route, you should remember that fund schemes in India do not have an annuity option. So one can receive regular income by opting for a systematic withdrawal plan.
One of the safer approaches available in India is the public provident fund (PPF) scheme, which is guaranteed by the government, has substantial tax benefits and gives good annual returns. This is a 15-year scheme, can be extended by a block of five years, and is considered one of the safest bets for building a long term corpus.
Usually, investors go for systematic investment plans (SIPs) to achieve long-term financial goals. However, SIPs in debt funds could be used to achieve short-term goals as well. Next week, we will discuss this approach.
Dos and Don'ts Of Retirement Planning
Ø The retirement corpus should make your later life tension-free. Spread your risks by proper asset allocation
Ø Set investment goals,
Ø confirm portfolio performance is on track. If not, rebalance
Ø Be disciplined, make regular contributions, and don't divert from the plan
Ø Increase your contribution to the retirement corpus every year
Ø Take help from your financial planner or advisor regularly
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