For most people, one of the most important financial goals is a comfortable retired life, after meeting all commitments along the way. In spite of this, a surprising number of people are vague about what retirement planning actually entails.
Retirement planning is not a matter of buying a few retirement-oriented products. Rather, itâ€™s the exercise of estimating oneâ€™s needs at retirement, and planning investments to fulfill them. It should ideally begin early. Most people start pretty late after 45 which causes avoidable uncertainty. In that state, people will buy anything that someone pitches as useful for retirement.
The first step in retirement planning is to know oneâ€™s current cash outflows. Then deduct the expenses that will cease after retirement, such as conveyance or education. Insurance payouts and loan installments are also unusual in retirement. Also, for most people, lifestyle expenses â€“ new clothes or cars are less likely. After deducting these, the resultant amount should be indexed for inflation.
Many people travel more in first 5-7 years of retirement, and the settle down to a routine of visits to their children and relatives. But higher medical expenses should be provided for. Most middle class senior citizens have some kind of medical cover, either from their employer who had a group cover that can be continued into retirement, or their own medical policy, or as dependents on the policy their children may have through their employer. If there is no cover at all, it must be arranged. On an average, one can assume an overall reduction of 25% after retirement, to the average expenses in the 60 months preceding retirement.
Taking a pension plan is not retirement planning. Most people want a stable monthly income during retirement. That is why pension plans are so appealing. Pension plans from Insurance companies come with and without insurance. In a plan that comes with insurance, the charges are high, especially if you buy the cover late in the day. Also, if you opt for unit-linked policies, youâ€™ll end up paying hefty upfront charges in the first year and possibly in the next couple of years, too. This will depress earnings. The biggest drawback of s pension plan is that the annuities that you will receive will be taxable; they would be not tax free in other insurance policies.
Also, at the time of vesting, pension policies allow you to take out up to 33% of the corpus without tax. Some policies allow you to take out more than that, but will be taxable; others allow you to just receive pension. So, if you want your money back, it may not be possible to get it.
Most people see the Provident Fund (PF) as a solid option they can lean on for retirement. But you cannot wholly rely on your PF corpus. Firstly, the corpus may not be enough to see you through the post retirement period. Most peopleâ€™s PF corpus is not what it should be, as they may dip into it to finance a home, education, or wedding. So many end up with a watered down PF at retirement. Statistics reveal that 85% of PF members have Rs 20,000 or less in their accounts. Secondly, the Employee Provident Fund Organization (EPFO) which manages the PF money entrusted to it, hardly inspires confidence. It is under-funded to the extent of about Rs 25,000 crore, or about one-sixth of the assets under management. Interest paid is in excess of what is earned. This is done through political intervention and by dipping into suspense account balance.
After estimating how much is required every year at retirement, then, the next step is to plan investment so that there are sustained monthly cash inflows. If your corpus falls short and you happen to own your home, a reverse mortgage is an option worth considering. It would enable you to earn an income for a particular period of time, depending on the properly value, the period of the payout and the interest rate. The retired couple can stay in their home, throughout their lives. After that, the property is sold, the lender takes its share, and distributes the rest among the heirs. At their discretion, heirs may repossess the property after settling dues with home finance agency.
The corpus of a retiree should be predominantly invested in fixed income securities like Post Office monthly income schemes, senior citizenâ€™s schemes, or bank fixed deposits which give monthly or quarterly interest. Though one may not want to take on much risk at retirement, about 20-25% could be in equity and mutual funds. Here, look for good large-cap stocks and diversified, balanced and index mutual funds. Stick to strong and well established organizations, even if the returns are lower and that would ensure timely payments.