Retirement can be a time for travel, golf, spending time with grandchildren or pursuing a hobby. It could also be a time when you anxiously count every penny you spend and worry about your future. What it is going to be like will depend on how well you plan while you are still working.
“It is never too early or too late to start planning for retirement,” says Anil Kumar Chopra, chief executive officer, Bajaj Capital Ltd. “But, the earlier you start, the better,” he adds. By saving a small amount today and investing it wisely, you can create a corpus that will take care of you in the years in which you are no longer earning. “Not so long ago, one used to think about retirement planning only for his or her post-retirement life,” says Hemant Rustagi, a Mumbai-based financial planner. “But, the recent layoffs of employees have made people realize the necessity of planning early for retirement.”
Planning a corpus
Planning for your retirement is, at its best, an educated guess. The size of your retirement corpus will depend on several factors, including your health and where you want to live. Generally, the rule of thumb is that you will need 80% of your current income to maintain the same lifestyle after retirement. But, to get a fair idea of the amount you will need, you have to answer certain questions. First, when do you want to retire? If you are looking at an early retirement, you need to save more. Second, what kind of lifespan do you expect? Then there’s inflation, the biggest hurdle in the path of wealth creation because it eats into your retirement corpus slowly but steadily.
Where to invest
This depends on your age and risk-taking appetite. If you are in your 20s and 30s, equity is your best bet. “In the short run, returns from equity are highly volatile. But in the long run, they are mostly positive and likely to beat inflation,” says Rustagi. Surya Bhatia, a New Delhi-based financial planner, recommends investing in mutual funds through systematic investment plans (SIPs), which involve setting aside a portion of your monthly disposable income for a particular investment option. SIP helps to spread your risks as you buy regularly over a period of time, which averages out your cost of purchase.
For those in their 20s and 30s, with retirement still more than 30 years away, nearly 50% of the total portfolio should be invested in equity and another 25% to 30% in tax-saving and fixed-return instruments, such as public provident fund (PPF), employer’s provident fund (EPF) and national savings certificate (NSC). The balance should be invested in long-term insurance plans, such as whole-life plans and Ulips. “The insurance portion should also include a pension plan,” says Chopra. However, not all planners advise insurance pension plans because of their high administrative and other charges compared with equity funds. This, they say, affects your investment.
Investing in property is another good option. If you take a housing loan when you are still in your 30s, you will be debt-free by the time you retire. Chopra says that once you are in your 40s, you should reduce the equity portion to 40%, increase the debt portion (PPF, EPF) to 35% and put the remaining 25% in insurance and pension plans. But, if you are already in your 50s and haven’t still started any planning yet, don’t worry. Chopra recommends equity exposure of only around 25% because you cannot afford to take too many risks. Another 25% should be put in insurance and pension plans, while the remaining 50% should be in debt schemes. Also, liquidity should be considered. So, you should not open a PPF account, having a lock-in of 15 years, once you are in your 50s. The other important thing is health insurance. Make sure to top up your health insurance cover just before retirement so that it lasts you for a few years into retirement. Also, your life insurance policies should mature before you retire. There is no need for a life insurance policy after that.
AMIT VIP, 40
City-based executive Amit Vip’s portfolio comprises 40% equity, 40% debt and 20% insurance. He invests in SIPs of equity-based mutual funds and also likes to dabble in the stock market. “I am a long-term player and hence, invest generally in blue-chip stocks,” says the father of two. Vip has made significant investments in post-office schemes, PF, EPF and PPF, and has a life insurance pension policy. “I have divided my portfolio in such a way that I get benefits of security, returns and liquidity.”
PANKAJ GOYAL, 35
A doctor working with a pharmaceutical company in Hyderabad, 35-year-old Pankaj Goyal has been investing in mutual funds through a systematic investment plan. His portfolio largely comprises equity-based mutual funds, nearly 70%, and the remaining in balanced funds. Even the insurance policies he has taken are unit-linked, giving his investments the maximum chance to grow. “I wanted to concentrate on equity but, at the same time, wanted to diversify my portfolio. So, I have invested in mutual funds, instead of any one particular stock,” says Goyal.
SACHIN SHARMA, 27
Sachin Sharma, who works with a multinational bank in Bangalore, dreams of retiring to a comfortable life of golf, sun and sand. “Although I haven’t been saving for a long time, I have made some investments for the long term,” he says. Sharma has made investments in unit-linked insurance plans (Ulips), equity-linked saving schemes (ELSS), and has also purchased some real estate. “Ulips and real estate are long-term investments keeping retirement in mind,” he says.
KAMLESH MONDAL, 54
Just four years away from retirement, 54-year-old Kamlesh Mondal, a factory manager at a Kolkata-based manufacturing company, realizes it is time to reduce his equity exposure. “My financial adviser has recommended that I should reduce it to 55% from 75%, and increase my debt exposure,” he says. Twelve years ago, he bought a pension policy, which will mature when he turns 58. Mondal enjoys day trading and his debt investments include PPF, government pension fund, relief bonds and money-back insurance policies.
Your foolproof game plan
In your 20s
• Invest in debt. Open PF and PPF accounts
• Invest in equity for the long term
• If you have dependants, buy life insurance. Term insurance is recommended
In your 30s
• Create wealth in the long run by aggressively investing in equity
• Take a home loan and spread it over 20 years
• If you haven’t already bought life insurance, buy now
In your 40s
• If still invested primarily in equity, reduce exposure and buy more debt
• Renew PPF account for five more years. Keep renewing till retirement
• Continue with your insurance cover
In your 50s
• Aggressively save for retirement
• Make sure your medical insurance policy is in place to cover future medical costs
• All loans should be paid off by now
• Continue with some equity investments for growth
Teena Jain contributed to this story
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