We all have thought of all the things we will do ONE DAY... Hopefully, after reading this post you will feel like you can bring that day closer.
Retirement is inevitable for all of us. But what is Retirement? Is it a certain age when an organisation decides you no longer work for them? Does being 58 or 60 years suddenly make you unproductive? Obviously, the answer to both of these questions is a big NO!
With life expectancy on the rise, many people would live easy 25 to 30 years after their official retirement age. During a bulk of this period, they are still quite productive, very experienced, don't have childcare etc bearing them down and can continue to enjoy life and contribute to the society in a meaningful way. In fact, the concept of retirement is only 75 years old. Before WW2, most people across the world worked till they could. So the question still remains, what is (or should be) Retirement?
Imagine a time when you have enough money to take care of all your needs for your lifetime and fulfil all your obligations towards your family and dependents. Once you achieve that milestone, you can pull out the list of all the things you would do ONE DAY... and do them. So, I guess that ONE DAY is your retirement day. You can continue to keep working after that, but without pressure of retaining a job or progressing to the next level for the sake of money. In fact, you lead a more fulfilled life, as you can work in the areas that interest you. You could make a huge difference to your community by volunteering or go back to school to learn something you always wanted to. Essentially, you life your life outside 9 to 5.
Planning for retirement: It is a simple process of identifying the following:
Your current Income
Your current savings towards retirement (EPF, NPS, NSC, Mutual Funds, FDs etc.)
Your ability to save in the future
Lifestyle you want to lead (monthly expenses)
Age at which would you like to retire
Table below provides some idea of how much you need to save to retire with a certain income. The table tells us:
How much your expenses would grow to (thanks to inflation)
How much corpus would be needed to retire at 60 and have the same lifestyle and
Monthly investment required to build that corpus (assumed return of 11% p.a.)
As you can see in the table, TIME is your biggest friend. The earlier you start, the easier it is to get to your goal.
While this is a simple way to identify your retirement investment plan, you can also plug in your personal information into this more sophisticated Retirement Planner. It will help you calculate how much you need to save to meet your target retirement age and lifestyle.
Where to Invest for Retirement?
Retirement is a long term investment hence your money needs to work hard! To do that, any retirement investment should be made in Equity linked investments for most of the time. In fact, I would recommend using equity as a major component of your corpus even during your retirement years to continue to beat inflation and gain handsome returns. Here are a few avenues open for you.
Employee Provident Fund (PF)
Voluntary Provident Fund (VPF)
National Pension Scheme (NPS)
Equity Mutual Funds (MF)
Employee PF: If you are a salaried employee, chances are that PF is getting deducted from your salary. Thats usually 10-11% of your total CTC (including your contribution and employer's contribution). This amount gets invested in safe instruments and hence has been earning in the range of 8% annual returns.
Voluntary PF: You could add to this scheme by opting for Voluntary provident fund (VPF). That's nothing but an additional percentage of your salary that gets deducted and invested in the same provident fund scheme. Recent Tax proposals have made Voluntary contributions to PF less tax efficient as interest on all contributions beyond 2.5 lakhs per annum would be taxable. This has led to VPF losing its sheen a bit.
Beyond your PF, most of your investment needs to go into Equity. For that I would recommend two avenues: National Pension Scheme and Open Ended Equity Mutual Funds.
NPS: National Pension Scheme is a sort of mutual fund built by the government of India to provide a way to save for retirement income to all citizens of the country. This is especially useful for professionals, self-employed and people engaged in their own business, as they dont have EPF available to them.
Some of the largest mutual fund companies (Asset Management Companies - AMCs) participate. You can choose your investment manager based on their report card and start investing. NPS has two types of accounts - Tier 1 and Tier 2. Tier 1 account is a protected account where you get income tax deduction for the investments made, and the money is locked away till you are 60 years old. Also, when you take the money out, you must buy an annuity (regular monthly pension scheme) for at least 60% of your Tier 1 balance and the rest can be withdrawn tax-free. There are provisions for the corpus to be withdrawn before the age of 60 in case of specific needs like children's marriage, house purchase etc. For more details, read the FAQ section of the eNPS website here.
Please note that there are no tax benefits to NPS Tier 2 account, but it is still a cost effective way of investing your money.
Opening an NPS account is easy and can be done online directly on the eNPS website or through many banks' net-banking portals.
Equity Mutual Funds: Investing in mutual funds is one of the most flexible, easy and rewarding way to build your retirement corpus. As there are many categories of mutual funds and hundreds of funds within each category, it could get quite confusing for a new investor. Hence sticking to some basic principles might be useful.
Equity gives better returns than Debt when investing for a long term goal such as retirement.
Growth Plans are better for corpus building rather than Dividend funds (which pay out monthly dividends).
Direct Plans are better than regular plans as you get more return for your money.
Sticking to funds investing in bluechip companies is better than higher risk funds investing in medium/ smaller companies.
Net, I would recommend Large Cap Equity funds for this purpose. The list below is from ET Wealth 8th Feb 2021 edition.
You can use many resources to shortlist the funds and build your investment plan. Here's two sources that I like:
Any of these resources can give you enough to understand the right schemes and funds to invest in and get started in your journey.
Remember, that time is your best friend (when you start early) and your worst enemy (when you start late) in retirement planning.
Therefore if there's one thing you should do.... that is Get Started! As you move along, you will learn and then depending upon your risk profile, you can always tweak your plan.