TomorrowMakers

Retirement seems a distant dream when you are young. However, it is important to start saving and investing early in your life, to reap the rewards in the golden years.

retirement planning

We start our career in that young, carefree and energy-drunk stage of 20’s. The very word retirement seems so distant that the thought of saving for it seems a rather ridiculous proposition. That unfortunately is the case with seven out of 10 working professionals. It’s the other three that get the better of life and living, both in their prime years as well as in their second innings.

It’s for you to decide if you want to solve only the short-term goals and plans while ignoring the inevitable, or you want to start working on your retirement plans from this day. Should you choose the latter, here are five financial instruments you will need.


1. NPS or National Pension Scheme

No prizes for guessing this! A rather eloquent and slightly authoritative an instrument, especially for the less disciplined. Under NPS, you invest money every year which is invested into equity, debt and government bonds over the years. At your retirement, you get a superannuated amount. Let’s see the value creation of NPS with an example. Presuming you’re 30 now, and you invest Rs. 5000 per month into National Pension Scheme for the next 30 years, your total invested sum is Rs. 18 lakhs. This will grow into a corpus of Rs. 1.2 crores at a 10% annual rate of return. Now here’s the magic, if you start investing at the age of 25 instead, this amount becomes approximately Rs 1.9 crores. But if you delay and start at 35, you will be sitting on a corpus of Rs 66 lakhs. This is to demonstrate to you the most powerful weapon while investing-- Time.

There are a few things you must know about NPS. Depending on your risk appetite, you can invest under three asset classes: equity, debt funds and government securities. Since the investment horizon is in decades, it’s best to maximise the equity investment (up to 50%). 

As for managing your investment preferences, you can opt for auto choice or active choice. Auto choice means your funds will be managed by the authority based on your age, and active choice means you get to choose the percentage of your contribution in each asset class. Remember, unless you’re extremely risk averse, it’s good to make equity the biggest part of your investment portfolio. All major private and nationalised banks are empanelled for you to open an NPS with. While you’re allowed to withdraw after at least 10 years of investing (for private employees), it is strongly recommended to forget this corpus till your retirement.

Smart Tip: You get a tax benefit of up to Rs. 50,000 under Section 80CCD (1B) by investing under NPS.


 
2. SIP in Mutual Funds

Enough emphasis can’t be put on investing into Mutual Funds through a Systematic Investment Plan. Mutual funds are like a gift that pay returns. While you save 30% tax by investing into tax-saving Mutual funds, you also enjoy a return of anywhere between 12% and 20% if you stay invested for long periods. Unlike FDs or LIC investments, which give inflation-beating returns (which means your money will increase but it’s worth will be the same), Mutual Funds are lucrative for building a corpus over a long term. Trick is to invest more into Equity Funds while you’re young and start moving your portfolio by 20% each year to debt funds in the last five years of your active service. If you are not familiar with Mutual Funds or find them cumbersome to invest into, you can hire an online fund manager or an expert to automate your investment and watch your money grow.

Smart Tip: As you grow wiser, diversify your Mutual Fund investment into various type of funds such as Sector Funds, MidCap Funds, Gilt Funds, and SmallCap Funds.


3. Equity investments

Equity or ‘Stock Market’ as it’s colloquially called is a powerful instrument for retirement planning, provided you know the basics and do your research. You can buy stocks in the secondary market (by trading them on stock exchanges) as well as in primary market (sold directly by companies, most commonly through an IPO or Initial Public Offering). As an equity investor, make sure you do good research on the company whose shares you plan to buy. Once you’re clear about the company, ensure you’re invested for long-term so that you benefit from real wealth creation, and not for short term, sentiment-based trading. If you feel you are risk averse and still want to invest into equity, you can buy stocks of Blue Chip companies like TCS, Infosys, HUL etc. These are highly likely to give you a handsome return if you stay invested for a minimum of 5 to 10 years.

Smart Tip: When you earn money through selling a stock, always invest it in buying another stock. Compounding in equity gets even magical if you reinvest the returns.


4. PPF

Public Provident Fund is different from the PF deduction you see in your salary slip every month (that’s EPF or Employee Provident Fund). PPF is a perfect risk-free balancer in your retirement portfolio. It helps you save tax under Section 80C and the interest you earn and the corpus you receive are both tax free. It has a compulsory lock-in of 15 years, making it a perfect instrument for retirement. You can invest any amount between Rs. 500 and Rs. 1.5 lakhs in one financial year. The current rate of return on the PPF is 7.6% per annum, compounded annually. Remember, this being a tax-free return (in the ideal case scenario), is equivalent to 10.85% return on a taxable investment.

Smart Tip: You can extend your PPF in blocks of five years once your original 15-year duration is over. 


5. Annuity Plans

As Life Insurance covers the risk of dying too early, an Annuity Plan covers for living too long. Simply put, you give a certain sum monthly/annually which - along with the accrued interest - creates an investment corpus. You can use this corpus to buy annuity payouts for the rest of your life, like pension. Annuity plans are either deferred, or immediate. Deferred annuity means you start investing during your working life, and start getting paid after retirement, making it ideal for salaried investor. Immediate annuity plans are for those who are retired or are approaching retirement as it starts giving a sum (can be fixed or variable) immediately. Annuity investments are tax free and the payout is guaranteed for life. You can even nominate your spouse to continue receiving payouts till they are alive. These features make Annuity a rather important instrument in your portfolio. It is however e important to thoroughly evaluate annuity plans on safety, coverage, returns, and liquidity before deciding on one. You may not enjoy a high return on Annuity plans, but a fixed monthly income, albeit small, will give you liquidity, self-reliance, and respect in your sunset years.

Smart Tip: If you choose a good plan, you can convert a deferred annuity into a fixed annuity immediately, if needed.


Other tips

While the above instruments will take care of your retirement, here are some tips to ensure you get the best of your life.

  • Buy a term plan as early as possible. A term plan is the one that pays a corpus (suggested amount is Rs. 1 crore) to your dependents in case of your death. The sooner you buy it, the better. Remember to keep your term plan and investments separate. 
  • Buy Medical Insurance. It helps you in case of disease, hospitalization, or any accident. It is your cover against rising medical cost.
  • Stay healthy: Retirement corpus is pointless if you are not in a condition to enjoy it. Invest in your health by eating balanced food, getting 45 minutes of exercise at least thrice a week, avoiding destructive habits like smoking and drugs, and maintaining a positive and peaceful frame of mind. It’s easier said than done, but it’s absolutely worth it.

I wish you all the best on your retirement planning journey. May it begin yesterday.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or insurance or tax or legal advice. You should separately obtain independent advice when making decisions in these areas. 

Pankaj Batra is an engineer and serial entrepreneur. Having sold his latest startup to Zomato, he is working on his next idea. He writes knowledge-enhancing pieces on Personal Finance, Travel, and India.

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