Will you outlive your money in retirement?
Lack of planning combined with a lack of prudence in investing appropriately for retirement could lead to the risk of you outliving your money. First of all, investors often tend to get the basic math wrong, one should always consider an age bracket of 85 to 90 years while planning your retirement corpus, this is the first step to ensure your plan is robust. There are a few other pertinent factors prevalent in the financial markets that could erode your gains if not accounted for while investing. They are:
- Rising health care issues
- Falling interest rates
Your retirement portfolio must include a holistic mix of all asset classes. The investments you choose for your retirement portfolio need to be inflation-proof guaranteeing that the passive income you are generating for the future beats the cost of rising inflation. Another important factor is to ensure that the instruments you invest in should be stable by nature. Investing in volatile instruments will put your capital at risk thus defeating the purpose of your investment in the first place. Interest rates and taxation should be accounted for accurately when investing. Similarly, investing in a pure term plan both for you and your dependents is a must. Avoid mixing investments with insurance, ULIPs, or any exotic money back plans which tend to lack liquidity and have high-cost structures deteriorating your gains over time.
If you think building a corpus is easy, try making it grow.
Every penny you carefully set aside today will work for you to secure your tomorrow. Here are some reliable asset classes, which included in your retirement portfolio could help you reach your desired corpus.
NPS is a low-cost market-linked product with unmatched tax benefits. Here 60% of your corpus can be withdrawn at maturity and will be tax-free. However, NPS comes with the compulsory annuity clause for the balance of 40% of the corpus. The subscriber invests this 40% in an annuity plan where he/she starts getting a fixed amount like a monthly pension as a regular income post-retirement. This guarantees you have a passive income flow and saves you the trouble of worrying about where to invest your matured corpus post-retirement. You have various funds available under NPS, right from conservative debt-only corporate bond funds to an aggressive fund with a 70:30 kind of structure. Based on your risk tolerance levels investors must define the fund level they are willing to invest in.
Under the exempted structures EPF continues to be one of the most favourable structures falling under the INR 2.5 lakh non-taxable interest bracket. Unfortunately, for the higher income group investors that exceed a take-home package of INR 20lakhs and above will have to consider other products beyond EPF.
Equity Mutual Funds:
Mutual funds are clear winners when it comes to equity, they can be very rewarding if saving for the long term. There are a good amount of themes available in mutual funds, based on an individual investor’s risk profile one can look at large-cap, mid-caps, small-caps, and sectoral funds to build assets. With the right plan, a 20-30 year time frame, and keeping in mind their risk appetite an investor can absorb higher risks at an earlier stage of investment for better gains. As time progresses and while one reaches close to retirement age, investors can gradually reduce investing in riskier funds. Direct equity should be avoided if an investor lacks the commitment of time and knowledge needed to track investments regularly.
Debt Mutual Funds:
In the debt market, static G-Sec funds and run-down maturity debt funds are available and offer a good structure for retirement planning. These are long-term investments and should be looked at from horizons that range over a timeline of 10 to 20 years at least. Today, G-Secs are also available to be invested directly which investors could choose to invest over the long run.
While real estate continues to remain one of the top physical assets invested in by Indian investors, from a retirement point of view it may not be an extremely favourable asset. The complexity of the assets remains in its illiquidity based on demand and the lack of its ability to be apportioned to raise part finance. While on the flip side, investing in property that earns you good rentals could be a great source of passive income as long as it generates right and continuous demand. From an inflation point of view, real estate in all possibility will offer you returns that exceed inflation.
Gold is an inflation-linked asset class and will offer you returns aligned with inflation. Unfortunately, gold is not a return-earning asset, it does not generate dividends or is not linked to any economic activity where its value can be factually calculated. Gold does show an inverse relation to the financial markets and can offer good value when the financial system crashes like it did in 2008.
To ensure stability and inflation-beating returns during your retirement years it is essential to have a robust plan that guarantees multiple streams of income. A single asset class or investment instrument cannot be relied on solely, this could lead to risks in case the specific asset class does not perform well in the financial markets. Hence, entrust your planning to an expert who helps you build a plan that ensures your investments are well-diversified across asset classes, match your risk profile and meet your set goals.