It is often said that life begins after 60 when people retire and start to pursue their dreams for which they did not have time during their working life. The retirement phase means the flow of income would stop but the expenses would continue. Therefore, you need to start preparing your retirement kitty as soon as you start earning to take care of your post-retirement needs and lead a comfortable life. But how do you ensure that your funds earn you a regular return and have a corpus that lasts through the golden years of your life?
You will have to invest efficiently to create a sizeable corpus that lasts your entire lifetime. There are multiple investment options available for this and selection will depend on your current age and earning profile. If you are young, which means you have a longer time horizon, you can go for equity-oriented investments. However, if you are late in starting your retirement plan, then you should stick to safer investments like fixed deposits.
Here are a few investment options you can consider to achieve this long-term financial goal:
When planning for retirement, it is wise to invest some proportion of your fund in a fixed deposit. This investment option is highly secured and would provide guaranteed returns. This will also ensure that you have funds handy in case of emergencies. However, given low rates of interest, this option results in lower actual return and may not be able to cover even the inflation. Fixed deposits can be created with banks or non-banking finance companies like HDFC and Bajaj Finance.
National Pension Scheme (NPS)
Pension plans are retirement-oriented schemes wherein an investor receives monthly pension payments and a lump sum amount when he attains the retirement age. The main objective of these plans is to have a regular stream of income post-retirement. Within NPS, you will have option to choose for allocation to Debt or Equity and you can choose out of multiple fund managers.
Employee Provident Fund (EPF)
Employee Provident Fund is mainly for salaried employees where both the employer and the employee contribute to a common fund, which the employee receives upon retirement. The employee receives his contribution as well as the employer’s contribution plus the accrued interest. The EPF accounts are opened by employers on behalf of the employees for which they need to register themselves on the Employees’ Provident Fund Organisation’s (EPFO) website.
Investment Oriented Insurance Plans
Apart from health insurance and life insurance, insurance companies also offer Unit-Linked Insurance Plans (ULIP) and annuities. These investment options offer a wide range of features for the investor to grow his money and build a retirement corpus. The investor needs to pay a regular premium under both options. In an annuity plan, the investor will either receive a lump sum amount on his retirement or regular payments till his death. While a ULIP provides dual coverage i.e. life insurance as well as cover for retirement. The investor can choose an insurance provider as per his requirement and accordingly buy a ULIP or an annuity. The advantage is that the returns are tax free. However, the expenses being charged by insurance companies could be on higher side compared to other options.
Mutual funds are an excellent option to get superior returns and create wealth for a long horizon of time. A systematic Investment Plan (SIP) is one of the best ways to invest for retirement planning. Many investors prefer SIP because they do not have to monitor the market closely, it lowers the investment requirement and helps develop a habit of saving frequently. The primary benefits of SIP investments are rupee cost averaging and compounding effect that helps the investor to generate higher returns. SIPs can be started in equity funds of your choice.
There are specific Retirement Plans as well by some mutual funds. To generate consistent returns, these solution-oriented funds invest in low-risk equities. The most important benefit of this investment option is that investor continues to receive income after retirement.
The first thing to consider while investing in a Retirement Fund is the amount of time you have till you retire. This also defines the risk tolerance of the investor. For example, someone in their late 30s can invest in a moderate-risk fund that provides regular returns over time. Young people have higher risk tolerance levels and can invest in a high-risk, high-return fund. Investors inching close to retirement can invest in a debt retirement fund. Whatever the risk tolerance of an investor may be, his ultimate goal should be to beat inflation and build a corpus that will allow him to live comfortably. Another factor is to determine the type of growth an investor wants to attain. He can invest in both equity and debt retirement funds if his goal is consistent growth with moderate risk.
Retirement Planning is one of the most important aspects of financial planning. Retirement planning is a multi-decade effort and hence investors must carefully choose their investment options. Whatever time you have got, it is not too late to start planning for your retirement. It is important to start retirement planning as soon as possible. While choosing investment options, it is important to strike a balance between return expectations and the lifestyle of the investor. Therefore, investors should try to build a flexible portfolio that will allow them to lead a worry-free and comfortable retirement.
(By Anurag Garg, Founder and CEO, Nivesh.com. Views expressed are personal)