Tuesday, February 24, 2009

How to plan for retirement??

Friends, today will discuss another subject which is of utmost importance to all of us i.e. retirement planning. We all come across too many stories in newspapers/TV about sorry state of senior citizens because of the financial condition that they find themselves in. Some of them are forced to spend their last few years of life in an old age home. So, we all need to plan for the future in such a way that we continue to live our life like we do today even after we have retired.

Lets understand the various aspecsts of retirement planning in little detail:-

1. Retirement Planning - For Whom??

Who needs to plan for his/her retirement? Is it menat for self employed?or people working in private organisations?or is it for govt employees?? Who exactly needs to plan for his/her retirement?? The answer to this is all of the above and many more i.e. everyone including you me and our neighbours and his neighbours. This is because

a.The average life expectancy ofIndians have gone up and hence there is a new danger staring at us and that is of living too long. If we were to live for another 25-30 years post retirement then surely we will need resources to see us through during those years.

b. More and more people are opting to work in private sector where there is no pension scheme provided by the employer.

c. Self employed people dont have any such facility.

d. We all would like to retire atleast at 60 years and then would want to catch up on our long cherished dreams/hobbies. We will need money for that as well. Hence retirement planning.


2. Retirement Planning - When to do it?

Now that we are convinced that we need to plan for retirement , the next question is when should we start ? The answer is today , coz the sooner you start the better it is . The longer you give your investment to multiply the larger would be your retirment corpous . Larger corpus would in turn mean higher annuities. So get going now. We all know, early bird catches the worm.

3. Retirement Planning - How to do it?

Now , how do we actually approach planning for retirement. This is where I will help you. Lets first for the sake of simplicity, divide the overall eligible population in broad categories

22- 35

35-45

45-55

55-60


For people in 22 - 35 year age group- Since they have a big advantage of time on their hand they must look at equites aggressively to build retirement corpus. My suggestion for them would be to go for

80% of the investment in equity based instruments like Equity MF, ELSS, direct equity ,PMS etc.

20% of the investment in debt based instruments like FDs, DEbt MFs,Corporate Bonds, NSC, PPF,PF etc.

For people in 35-45 year age group - They should go with following strategy:

60% of the investment in equity based instruments like Equity MF, ELSS, direct equity ,PMS etc.
40% of the investment in debt based instruments like FDs, DEbt MFs,Corporate Bonds, NSC, PPF,PF etc.

People in 45-55 year age group - They should go with following strategy:

50% of the investment in equity based instruments like Equity MF, ELSS, direct equity ,PMS etc.
50% of the investment in debt based instruments like FDs, DEbt MFs,Corporate Bonds, NSC, PPF,PF etc.


People in 55-60 Years age group - Since they dont have time at their hand , hence their risk appetite too would be low. Hence would not suggest them to look at equity at all since its a high risk product for shorter duration. Instaed go with debt instruments only. To beat inflation may be they could look at investing 10-15% of the funds in good equity based MF.

4. Pension Plans from Insuarnce Companies- Are they worth it??

Pension funds from insurance companies are good way of building ones retirement fund , but, would still suggest one to go with the other instrumenst mentioned coz they give better returns over large period on account of lower charges.


5. How about Gold?

Lot of people want to know if gold is a good bet in the long run. The answer is yes and no both. Yes coz is a great product to beat inflation , but no coz it does not give you superior returns. At best one can have gold in his portfolio to beat inflation. Though these days gold has been an outperformer of sorts.

6.Retirement Planning- Tax Angle

The govt of India encourages everyone to plan for retirement and hence offers income tax exemtion upto Rs 1 lakh invested in pension fund under Sec 80 C. Also part of the maturity amount is tax free as well.


So, all in all planning for retirement is a need for everyone and requireslittle bit of planning and lot initiative from our side. Read other posts on the blog(http://moneyforinvestment.blogspot.com/) for more info on this.

Happy investing...


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