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Retirement Planning Month at investment-mantra.in

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Retirement Planning is one such long term goal which should be on the radar of each individual . Investors need
to have a well chalked out road to a financially independent retirement life.
Days of joint family era , guaranteed pension , low inflation , assured returns are all but over.Today high salaries ,
insecure jobs , high inflation , nuclear families are in. But with high salaries , make sure you have planned for
your retirement and if you have not , then we will try to shake you out of slumber.
Earlier you plan , better it is as it gives much more time for your money to grow (power of compounding) . In
addition in todays age , people want to retire early so as to pursue ones hobbies. So there is a double challenge
for a shorter horizon to save for retirement and a longer period of withdrawals. Next , improvement in health
care facilities especially in urban areas have pushed life expectancy in India. Since you live longer , you need to
save more.
(A) How much corpus you will be comfortable with at retirement?
Most significant thing in retirement planning is to reach to a correct retirement corpus figure. Mis-calculating
this figure can land you in trouble later. Biggest challenge comes from inflation which can substantially eat into
your savings. Just as compounding works to inflate your corpus , inflation eats into your value. For instance , a
sum of one crore seems a lot of money today but over 20 years even a low inflation of 5% can reduce your corpus
to just 35 lakhs. So in general , an average Indian investor is not aware of losing purchasing power due to
inflation. Retirees who no longer earn but depend solely on returns from their investment need to be extra
cautious.
If your monthly expense is Rs 30,000 and you retire 30 years from now , you will need Rs 1.80 lakhs per month ,
assuming the annual inflation rate is 6%. Even if you can manage with 80% of your present expenses , that is Rs
24,000 , still you will need Rs 1.44 lakhs every month. In addition if you live till 85 with rising living standards
and progress in medical science , that is a conservative estimate that is for 25 years after retirement (assuming
you retire at the age of 60 years) , the value of nest egg you will need is staggering Rs 4.5-5 crore. That is if
we assume 6% annual inflation and 12% return on investment before retirement. If we assume 8% inflation , the
corpus required is a mammoth Rs 12 crore.
To calculate money you need for retirement , first calculate your average monthly expesne. Lets assume is is
30,000 per month or 3,60,000 per years. Add another 40,000 as miscellaneous expenses and the annual total

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comes to 4,00,000. If inflation is assumed to be 6% and you expect to retire after 30 years , your annual expnese
at the time of retirement will be Rs 22.97 lakhs. If your investments earn 12% annually in 30 years and inflation
is 6% , your effective rate of return is 6%. The corpus required at the time of retirement will be 3.83 crore. Lets
assume if you live till 85 , you will need close to Rs 6.3 crores.
In nutshell , make sure you have zeroed in on how much corpus you need by the time you retire. Take into
account inflation while deciding on the corpus amount. All boils down to your yearly expenditure , inflation
expected over the years and standard of living you want post retirement.
(B) Be an Early Bird
Positive thing among all these huge figures is that if an individual starts early along with a decent jump in
incomes over time , expanding career options provides good opportunity to build a sizable nest egg. Early you
start better it is. An early start means you will have to save a lot less to create the same corpus. One most
common mistake people make is to defer retirement planning till its very late. For instance , if a person starts
contributing to retirement corpus at the age of 25 , the monthly outgo will be Rs 9,700 if he wants to build a
corpus of Rs 6.3 crore at retirement and if the rate of return is 12%. If he starts 5 years later , he will have to save
Rs 17,800 every month to build the same corpus.
For most , it means just contributing to Employee Provident Fund (EPF) and Public Provident Fund (PPF)
accounts. Either they dont want to spend time to calculate the corpus they will need for retirement or just
are focused towards short and medium term goals thinking retirement still is too early to plan.
An early start also gives you freedom to take risks. Equities , for instance has given higher returns than other
assets Gold , debt and real estate in the long run. In the last 31 years, equity markets provided a
compounded annual growth rate (CAGR) return of 16.85% which is higher than other asset classes. So you can
allocate a large chunk of money going into building a retirement corpus in equity or equity related instruments if
you start early. As you approach retirement , you cans tart liquidating these high risk , high return equity
investments and go for safety of fixed income options such as debt funds , bank fixed deposits.
(C) Remain focussed throughout for this Long Term Goal
First thing you need to do while planning for your retirement is to make sure you keep this goal completely
separate from your other short , medium and long term goals such as buying a house or child education to name
a few. Make sure you keep it in mind that this corpus will be used only when you stop earning. So make sure
you estimate the money needed for each financial goal and invest accordingly.
(D) Where to invest?
Make sure you keep it simple and dont invest in products you dont understand. Ensure you dont get carried
away by high pitched market campaigns. Check if the product can give you the desired returns and matches your
risk profile.There are many debt and equity oriented financial instruments which can help you build a sizable
retirement corpus.
Lets go through different products which can help you build a nest egg big enough to last your lifetime.

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Mutual Funds : Mutual Funds can help you if you dont have time and patience to manage your investments in
stocks directly. They are considered one of best products due to the sheer variety of schemes that suit every
profile , low costs , tax benefits and professional management. Equity mutual funds , which invests upto 100%
money in stocks can easily give you 12-15% returns an years on an average in the long run. This makes them
ideal for those with a high risk appetite. Those with slightly lower risk taking ability can go for equity oriented
hybrid funds , which invests upto 65-70% in stocks and the rest in fixed income securitiees such as bonds and
treasury bills. Long term capital gains from equity mutual funds (with over 65% equity exposure) are tax free ,
making them all more attractive. Those with limited risk taking ability , for instance people close to retirement
can go for debt funds which invest in corporate and government bonds.
Having said that since its your money , you need to do few things right as regards mutual funds are concerned.A
Systematic Investment Plan (SIP) in good diversified mutual funds is a good option for those who wish to build
their fund portfolio gradually. It prompts investors to save in a disciplined manner. It also minimizes risks of
bad timing of investments. Mutual funds offer the convenience of investing small amounts at regular intervals
daily , monthly or quarterly.
You can read more about Mutual Fund Investment Mantra , Top Mutual Funds and Why SIP? Mutual
Fund Detailed Analysis at investment-mantra.in . If you have any queries , feel free to post it at Mutual Fund
Query Corner.
Your portfolio of funds must have an allocation pattern that meets your return objective and is in line with your
risk profile. Young investors can have 70% of amount directed to large-cap and multi-cap diversified Mutual
Funds , 20% to mid-cap and small cap funds and rest in gold ETF or sectoral bets. Study the mutual fund closely
before deciding to invest in it. Make sure you dont over-diversify and end up having too many funds in your
portfolio.Look for AMC , fund size , fund manager performance , objective of fund , sector it invests in and
allocation , performance over 10 year , 5- year period , top holdings etc. Avoid investing in NFOs.
Public Provident Fund (PPF) and Employee Provident Fund (EPF) : If you want some portion to go in
debt , you can look at Public Provident Fund and Employee Provident Fund. PPF is a government scheme under
which you get an 8% annual return. The minimum investment is 500 per year and maximum is Rs 70,000. The
money is locked in for 15 years . One can extend the account beyond 15 years in a lot of 5 years and withdraw up
to 50% of corpus after the 7th year.
In EPF , one contributes 12% pay (basic plus dearness allowance) , while the employer makes a
matching contribution. All establishments that employ 20 or more people have to offer this benefit to
employees. The rate of return keeps changing and is decided by central board of trustees of the fund every year.
At present , it is 9.5%. The money can be withdrawn on retirement or while leaving the organization. In the latter
case , there is an option to transfer the amount in the account opened with new employer.
PPF and EPF investments are deductible from the taxable income under Section 80C. The redemption amount is
not taxable.
You can read more about PPF and EPF at investment-mantra.in
Investing in Stocks directly : Besides this you can consider investing in blue-chips stocks which can give you

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rich dividends by the time you close in your retirement. If you can give some more time to equities and try to
understand few businesses which can grow by leaps and bounds in come decade , nothing like that.
Equity SIPs can also be a smart option in volatile stock market conditions such as one prevailing currently.
Read more about blue-chip stocks and equity SIPs at investment-mantra.in.
National Pension Scheme (NPS) : NPS is government initiated pension scheme. Under it , you have to
contribute atleast Rs 6,000 a year in a Tier I account and a Tier II account. The money in the Tier I
account cannot be withdrawn till retirement. There are no limits on Tier II withdrawals. You need an active
Tier I account to open a Tier II account.
You can choose 3 asset classes . Asset Class E , where money is predominantly invested in equity and
related instruments

; Asset Class C , where money is invested in fixed income instruments and other

government securities ; Asset Class G , where the entire portfolio comprise of government securities. . Under
Asset Class E , the maximum equity exposure can be 50%. Except central government employees , others can
choose any asset class.
Investments are eligible for tax benefits under Section 80C. However the maturity amount is added
to income and taxed accordingly.
You can read more about National Pension Scheme at investment-mantra.in
Unit Linked Pension Plans (ULIPs) : Unit Linked Insurance Plans combines features of insurance and
investment products. A part of money gets you a life cover while rest is invested in equity or a mix of equity or
debt. ULIPs as compared to mutual funds have multitude of charges allocation charges , policy administration
charges , fund management charges and morality charges. Hence , they are considered more expensive than
mutual funds.
However , ULIP pension plans are pure investment vehicles. Since there is no insurance cover , the investor can
save on morality charges. Since IRDA has issued guidelines as to give guaranteed retuns in ULIP pension plans
, the companies play it safe and invest more in debt. This make ULIP pension plans less attractive who are
seeking high returns.
Investment in ULIP pension plans is eligible for tax deduction under Section 80 C of the Income Tax Act. The
maturity proceeds are tax free. The tax benefits are likely to continue under Direct Tax Code , proposed to be
implemented from next year. which will take other ULIPs out of Section 80C.
Investment Options

Risk Profile

Stocks

Very High

Equity Mutual Funds

High

ULIPS

High to Moderate

Endowment Plans

Low

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Bank FDs

Very Low

PPF , EPF

Very Low

Debt Funds

Low

(E) Investment Options for Different Age Groups : Make sure as you approach retirement , you should
increase exposure to less risky investments as the number of working years is less and you have to protect your
corpus from the vagaries of the equity markets. Therefore you may need to re balance your portfolio as you cross
different age groups. There is no strict demarcation , though , as investment portfolio is a function of ones risk
taking ability , existing investments , income , expenses and financial goals. Still er can evaluate 4 different
portfolios for four different age groups : 18-25 years , 25-35 years , 36-45 years and 46-55 years.
(a) Age 18-25 years : This is the time when you start your career and have no liabilities and dependents.
Though your income is less but so are your expenses. You have time on hand and can afford high exposure to
equities. Ideal portfolio can be close to 85% equity , 10% debt and 5% Gold.
Make sure you park adequate money in a savings account or a liquid scheme for any medical or financial
emergency. You can invest in equity mutual funds through SIPs as it makes you more disciplined.
You can have exposure to stocks under proper guidance. You can defer your goals for buying a car or house for
some time as your current income dont allow you to invest in these. However you can start investing in small
amounts for your retirement.Make sure you have adequate health insurance so as to take care of any medical
emergency. If you dont have any dependents , you dont need any life insurance currently. You should focus on
acquiring more skills at work so as to increase your income substantially going forward.
(b) Age 26-35 years : Your income increases and so are your liabilities. You are still far from retirement and
can have high exposure to equities. Since you have more liabilities now , make sure you have exposure to fixed
income instruments for a cushion against volatility in equity markets. Make sure you start contributing to PPF
and EPF as part of your debt allocation. You can have equity : debt : Gold ratio as 75 : 15 : 10
You can go ahead and buy a term life insurance policy with a cover that takes care of your liabilities , your future
income generation potential etc.
Read more about Term Plan at investment-mantra.in
Make sure you create a contingency reserve based on your monthly expenses for 3-6 months and keep it
aside.Besides this continue your investments in SIP and maybe increase its allocation as your salary increases.
See if you need to enhance your health insurance cover and have a family floater plan in place.
(c) Age 36-45 years : Your liabilities increase faster than income. Hence scale up your investments in PPF and
continue with EPF. Equity can still continue to be 65% of your portfolio while debt and Gold accounting for 25%
and 10% respectively. This is the time when ones earning graph moves upwards and same should hold true with
investments.Also evaluate again your life and health insurance cover and see if you need to enhance both of
them.
(d) Age 46-55 years : Continue with your investments in equities though you can scale it down to 50% and

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increase debt exposure to 40% (debt instruments such as PPF , EPF , debt mutual funds , bank and corporate
FDs). Keep investing in Gold at 10% allocation.
Your priority should now start shifting slowly towards protecting your already built retirement corpus from
equity market volatility. At this stage of your life , you may need to enhance your medical cover. Focus more on
paying off your debt and liabilities for a peaceful retirement.
Please share with our readers your financial plan for retirement so that we all can learn from each other correct
and not so correct decision making. Since we are celebrating Retirement Planning month at investmentmantra.in , make sure all our readers plan for their retirement and share with us your plans in brief.
You may want to read :
Know National Pension Scheme
Investment options in Retirement Zone
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