Building a strong and healthy retirement corpus is a daunting task, but if planned well it can yield returns that will provide comfort in your golden years. While drafting a retirement plan, the objective should be to ensure regular flow of income that can meet your day-to-day expenses and provide you a comfortable lifestyle.
It is always wise to start planning your retirement fund at the earliest. Here is a few crucial points to keep in mind while choosing a retirement plan.
Return on investment should be greater than the rate of inflation
Planning for retirement is a long-term financial goal. While investing for this period, people often face a major challenge as how to protect investment from capital erosion. Inflation consistently acts against the value of your wealth and investment over a period of time. So, if you can buy something for Rs 1 lakh today, 20 years hence you would require Rs 3.27 lakh to buy the same thing if inflation during the period remains at six percent.
One must focus invest in instruments which generate a return higher than the prevailing inflation rate. For instance, prevailing CPI (Consumer Price Index) inflation is around five percent level. If you are planning to invest now, focus on earning a post-tax return higher than five percent.
Banks are currently offering a fixed deposit rate of around 6.5 percent per year. But if you fall in the 30 percent tax bracket, then the net return would be only 4.55 percent per year, which is much lower than the prevailing inflation rate. This would lead to capital erosion in the long-term.
One should review their investment portfolio regularly to make changes as per the prevailing inflation rate and ensure that they beat inflation by an adequate margin to earn a higher rate of return.
Target adequate pension income
Plan your retirement in such a way that you earn pension income which would be sufficient for both all your dependents. Your pension income should continue for your dependents even after your untimely demise. One should also ensure that income after tax deduction is adequate enough to meet your regular expenses.
Do not ignore complimentary investment benefits
While selecting a retirement plan, look at the add-on feature offered with it. One may receive benefits like premium waive off in case of demise of the proposer /policy holder and continuation of regular flow of pension income without any break. One can also check benefits like higher cover for accidental death, critical illness benefits, etc.
Liquidity is important post retirement
Post retirement, your dependency on liquidity would increase as you may require money for medical and day-to-day expenses. If your funds are locked up for a certain period, then it may put you in financial distress. So, ensure that your money in an instrument which offers easy liquidity.
Flexibility in investment
Your retirement focussed investments should be flexible to adjust to your life changes whenever there is need. Suppose you receive a bonus, then your instrument should allow flexibility of investing a lump sum amount while at the same time allowing you to accordingly reduce the regular investment amount if there is a fund constraint. Similarly, retirement investments should allow easy entry and exit so that investor can take a call during adverse market conditions. Flexibility is very important when you invest for the long-term.
Manage risk and ensure guaranteed return
You must manage risk consistently over a period of time. Initially one can afford to take higher risk. Gradually one should scale down risk as retirement nears. In the last few years before retirement, stick to low risk and guaranteed return investment to ensure that one does not lose out on account of market volatility.
Investment options for your retirement
Investment options may vary according to age when you plan for your retirement. In initial years, a major portion of your portfolio should consist of equity-oriented investments to earn a high return and a small portion should be allocated to debt instruments including pension plans like the National Pension Scheme (NPS). Once you reach the midpoint of your career, you should assess your retirement objective and accordingly make changes in the investment portfolio by cutting down exposure to equity-oriented investments and up investments in debt instruments. During the last leg before retirement, the portfolio should include low-risk investment products and try to consolidate RoI. Post retirement, use the corpus to invest in a regular income plan such as immediate annuity.
While drawing up a retirement plan do not forget to buy adequate life and health insurance and pay its premium without any break. It is also important to maintain a contingency fund for your post-retirement life.