“The early bird catches the worm.” Haven’t we heard it often enough as kids? It’s also the perfect way to sum up why you need to start planning for your retirement early. Let’s start with an example. If your monthly expenses are Rs. 30,000 and you retire 30 years from now, you will need Rs 1.8 lakhs per month to maintain the same standard of living in 30 years, assuming the inflation rate is 6 %. Get our drift?
It doesn’t end there. With advancements in medical technology, the average life span has gone up and so have medical expenses. Combine this with a regular increase in living expenses or inflation and you will understand why it’s so important to build a comfortable nest egg while you’re still young.
The silver lining is that with the investment options we’re going to tell you about, you can plan for a comfortable life post retirement, without any dependency on anyone.
Now, there are two phases in retirement planning – accumulation (pre-retirement) and distribution (post-retirement). The accumulation phase is when you collate the amount required for your needs post retirement. The distribution phase is when the accumulated corpus is distributed among different investment instruments to meet your post-retirement needs.
We bring you the best investment options to not only save money but also to make your money work hard for you, both before and after retirement.
Pre-Retirement Investment Products
NPS or the New Pension Scheme is open to all Indian citizens and is mandatory for government employees. In the last 4 years, NPS has delivered annualized returns of around 10%. The great thing about this scheme is that the fund managers can decide to be exposed to equity and equity related instruments, which will build a better post-retirement portfolio in the long run.
NPS provides tax benefit as well in the form of deduction under section 80C, however, it’s mandatory to purchase an annuity worth 40% of the corpus accumulated through NPS at the time of retirement.
Employee’s Provident Fund or EPF is one of the country’s most popular financial instruments for retirement saving. Currently, the rate of interest offered is 8.5%, per annum. EPF is also very tax efficient offering a deduction up to a lakh, under Section 80C. Moreover, the interest you earn from EPF is tax free and so is withdrawal, if you have been engaged in service continuously for a period of 5 years. However, the best idea is to stay invested even during job changes by transferring the EPF account to your current employer as this lets you enjoy the benefits of guaranteed returns along with the power of compounding.
Equities: An equity investment refers to purchasing and retaining shares of stocks and mutual funds on the stock market. You get in return, income from dividends and capital gains, as the value of stock rises. Equity investments usually give the best returns and it’s better to invest for longer tenures, at least 10 years or more to reap the maximum benefit. However, it’s a good idea to do a regular review of your portfolio and switch to or invest in different products if your current portfolio is not doing well.
Mutual funds provide you with the option of a monthly Systematic Investment Plan (SIP) with which you can build an attractive nest egg, post retirement. That is, if you invest in a disciplined manner. Equity products are also 100% tax exempted after the first year of investment.
Exchange traded funds (ETF): One tip you probably hear a lot regarding investments, is to diversify. Diversification means investing in a number of products to spread out the risk, rather than investing your entire capital in one particular product. This is where ETFs help you to build a diverse portfolio, on relatively lower investment threshold. In India, an ETF can invest in stocks that are made up of an Index. Another popular option is Gold ETFs which are a wonderful investment idea for senior citizens. A Gold ETF is nothing but purchasing gold in electronic form, just like buying stocks. Each Gold ETF you invest in is equal to the price of 1gm of Gold and the returns you receive will also closely match the domestic price of real gold.
Bonds: When you buy a bond, you’re basically loaning your money to the bond issuer for a fixed time period, usually 10 to 15 years. In return, the issuer promises to pay interest every year and pay the principal amount you had originally loaned at maturity. Some of the bonds provide quite a good rate of interest – around 10 to 12%, per annum. There are plenty of bonds available in the market, but it’s important to check the ratings before you invest. One thing to remember is that there are no tax benefits on bonds at the time of investment.
Post-Retirement Investment Products
Monthly income Schemes (MIS): A MIS gives you a guaranteed return on your investment. If you want investment schemes which will generate an assured monthly income, this is perfect for you. You can open an account in a post-office or invest through mutual funds.
The maturity rate is 5 years and you get an interest rate of 8.4% per annum, payable monthly. The maximum investment limit is 4.5 lakhs for an individual and 9 lakh for a joint account. You also have the option of transferring your account to any post office
Senior Citizen Saving Scheme (SCSS): It’s the safest investment option for senior citizens and you can open an account in any post office or a nationalized bank. You can gain an interest of 9.3% p.a with a maturity period of 5 years. You can deposit money only once in your account, in multiple of 1000, not exceeding 15 lakh.
Reverse mortgage: enables senior citizens to receive a steady flow of income from the lender in lieu of mortgage on their homes. As a senior citizen, you can live on your property until your death and receive regular payment on it, for a specific time period. The amount of money you will receive from the bank depends on the valuation of your property, the current property prices and condition of the property, as well as the term you opt for.
a Reverse mortgage is an interesting option for senior citizens who need a steady flow of income and the income received is completely tax exempted.
Pension Plans: You can choose to invest in pension plans through insurance companies or mutual funds. After you buy a policy from these institutions, they will invest your fund according to the kind of policy you have opted for and keep you updated on their growth. You will start receiving monthly payments after you turn 50.
Liquid Funds and FDs: You have always known that saving up for a rainy day is a really smart move. As a senior citizen, this is even more important, especially since inflation, ever increasing medical costs, etc are always just around the corner. At the same time, you wouldn’t want your money to be lying around when you could instead make it work for you by making a few smart investments. You can opt for liquid funds or fixed deposits of suitable tenures to keep your money growing. Liquid funds are tax efficient as well.
With the innumerable financial products available on the market, it might be confusing to decide which ones are worth investing. What you need to keep in mind is that the decisions you make now will go a long way in determining the way you live your life in the future. So, make smart choices and keep putting something aside for your post-retirement life regularly. Retirement is not the end of life, rather it gives you a new lease on life. Make sure you’re prepared to enjoy it to the fullest!
Additional Reading: Quintessential Investment Plans from Your 20s to Your 60s