Here’s How To Plan A Dream Retirement

Hemant Rustagi

CEO, Wiseinvest Advisors

A disciplined approach coupled with an appropriate asset allocation can make it easier for investors to plan their retirement, says Hemant Rustagi

Retirement planning should be one of the key long-term investment goals for any investor which is often ignore by investors. While some of them get overwhelmed by the challenge of building a large corpus to lead a comfortable retired life, others do not even start the process, either thinking that they do not have enough money to begin with or fearing that they might end up making wrong investment choices.

The truth, however, is that a disciplined approach coupled with an appropriate asset allocation can make it easier for investors to achieve this important goal. Moreover, by starting the investment process early, investors can build a large corpus with smaller contributions through by the power of compounding. Investing in tax efficient and simple investment vehicles like mutual funds can not only help in earning positive real rate of return but also in staying ahead of inflation.

Another challenge before investors is to generate regular income after retirement. Many retirees err by investing their entire retirement corpus in low yielding instruments with a lock-in period. By doing so, they not only compromise on liquidity but also fail to keep pace with the inflation rate. To enhance the overall portfolio return, one must include market linked products such as debt and debt oriented hybrid funds in it.

Besides, a proper strategy can ensure that one doesn’t outlive one’s money. Retirees must assess their requirement of regular income. For those who receive pension, the monthly requirement needs are to be adjusted accordingly. It is also important to factor in the increase in monthly expenses over the years due to inflation. Once this amount is ascertained, it will help in deciding the kind of returns one needs to generate from the retirement corpus and the required portfolio mix to achieve these returns.
[PAGE BREAK]
For example, for a retiree who has a retirement corpus of Rs 50 lakh and has a monthly requirement of Rs 30000 (Rs 3.60 lakh annually), even a return of around seven per cent would suffice. However, considering inflation to be at seven per cent, he will require a monthly income of Rs 60000 after 10 years and would hence need to generate a return of around 14 per cent. If the retiree decides to lock-in his/her investments in instruments offering fixed but lower and tax inefficient returns, he/she is likely to struggle to keep pace with increasing expenses. Therefore, the portfolio needs to be designed in a manner that not only meets the person’s regular income needs but also provides an opportunity to earn capital appreciation to take care of inflation over time. Besides, liquidity provided by the investment option has to be given its due.

Some of the options for generating a regular income after retirement are:

Post Office Monthly Income Scheme (POMIS) – POMIS currently offers a return of 8.4 per cent and the maximum investment limit is Rs 4.5 lakh in a single account and Rs 9 lakh in a joint account.

Senior Citizens Savings Scheme (SCSS) - SCSS currently offers 9.2 per cent by way of a quarterly interest and a maximum of Rs 15 lakh can be invested. There is an option of investing Rs 15 lakh each in two separate accounts in the name of the husband and the wife (provided her age is 60 years or above).

Bank deposits - Bank FDs offer interest on a monthly basis. However, the interest rates will vary depending on the prevalent interest rates at the time of depositing the money.

MIP of Mutual funds - These are typically debt-oriented hybrid funds that invest a major portion of the corpus in the debt instruments and a small proportion in equities. These funds have the potential to offer higher returns than traditional options but the returns can be a little erratic. However, considering that the DDT (effective from June 1, 2013) for individual investors in debt and debt-oriented funds will be 25 per cent, the dividend payout option will become unattractive for those who are in a lower tax bracket. However, the potential to earn higher returns than traditional options remains intact.

One way to tackle the issue of higher DDT is to opt for a Systematic Withdrawal Plan (SWP) after completing one year as long-term capital gains are taxed at a concessional rate of 10 per cent. Through SWP, one can instruct the fund to redeem a particular amount every month on a fixed date and utilise the same as a regular income.

Besides, there are options like NCDs and tax free bonds. Ideally, the portfolio should be a mix of traditional options and market linked instruments to get a regular income as well as capital appreciation.