Retirement can be postponed but can never really be done away with. The whole problem with your retirement is that your income either stops or halves but then your expenses don’t. That leaves a huge deficit to be bridged in your sunset years. With better medical facilities, most Indians are living longer than ever before. That means you have more number of years to depend on your accumulated savings; and that is a real worry.
Interestingly, when it comes to retirement planning, the earlier you start the better. Many youngsters believe that 25 may be too early to think about retirement. Perish that thought! When it comes to retirement planning, the earlier you start the better. When you start saving and investing early, you accumulate more over a period of time. When you accumulate more, you earn more returns on this accumulated sum. Over a longer period of time, not only your principal but even your accumulated earnings tend to earn more for you. The earlier you start, the longer your money works for you. That is what the power of compounding is all about! And nowhere is this power of compounding more relevant than in the realm of retirement planning.
Retirement planning – Use mutual funds to beat inflation…
You just cannot underestimate this risk. Take a simple example. The real value of 1 Rupee in the 1940s is probably worth 4 paisa today. That means over the last 70 years, your money has depreciated by almost 96%. The moral of the story is that you need to earn a decent spread over inflation to ensure that you actually accumulate wealth in real terms. If inflation is 8% and you are earning 7% returns, you are actually destroying wealth over the long term.
Let us assume inflation at 5% per annum. If you are spending Rs.1 lakh on your monthly expenses today, then purely due to inflation, you will be spending Rs.4.5 lakhs per month for your monthly expenses when you retire after 30 years. If you consider equity or balanced funds, they are able to substantially outperform inflation over longer periods of time. That is what makes mutual funds an excellent inflation hedge in your retirement planning.
You can pigeon-hole plans to your unique needs…
Retirement is not just about leading a laid-back life amidst the seductive backwaters of Kerala. It entails a lot of responsibilities; your children’s education, their marriage, your home equity before you can embark on a peaceful retirement life. Mutual funds allow you to dedicate separate set of funds for each commitment that you have. You can also adjust your mutual fund to you goals in terms of liquidity. For example your retirement that comes up after 30 years can risk a higher proportion in equities. But your home equity which is coming up in 5 years or your child’s education that comes up in 8 years needs to balance between liquidity and risk. Mutual funds offer you that unique flexibility to adjust sets of products to your unique needs. Remember, retirement does not happen at a point of time, but over a period of time.
Or just opt for plain pension plans…
For years retirement planning has been predicated on provident fund accumulation, which is predominantly a debt investment over a longer period of time. While it surely beats inflation, it is an inefficient way to allocate all your money when you have the appetite to take a higher risk over a longer time frame. Pension plans of mutual funds combine 4 critical attributes of retirement planning. Firstly, they offer the ability to plan for your retirement needs and plan your savings accordingly. Secondly, it is possible to build an insurance clause into your mutual fund portfolio through the use of ULIPs. Remember, insurance is a must because an exigency can put paid to your financial plans. Thirdly, pension plans of mutual funds offer you the ability and the leeway to mark specific allocations for specific requirements. In this way there is a clear alignment between your goals and your plan. Last but not the least, these pension plans give you an option wherein you can commute and take the retirement corpus. Alternatively, you can also opt for converting into a pension plan where you receive a fixed sum each month for the rest of your life.
These pension plans of mutual funds offer an off-the-shelf solution for people looking to plan for their sunset years. If you want to avoid the hassles of going through a very detailed planning process, this off-the-shelf product could be your answer. However, in your own interest it may be advisable to do a thorough and professional review of your needs and plan with the help of a professional financial planner. It can make the entire process of retirement planning not only more insightful but also more enlightening and meaningful for you.
Sidelight: In 1963, Japan had 153 persons over the age of 100. Today Japan has 29,357 persons over the age of 100. That is how fast life expectancy has improved in the world. Since 1963, the Japanese government was presenting a silver cup worth $65 to everyone who turned 100. That practice had to be stopped as the state could no longer afford it.
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