Plan for more than you need
When it comes to retirement planning, you need to evaluate how much income you will need at the time of retirement. Note that while earmarking your income for retirement, it always should be more than what you need. To have a great retired life, you will need 70% to 90% of the current income. For instance, if you’re earning Rs.70,000 monthly, your monthly earnings at the time of retirement should be nearly Rs.49,000 to Rs.63,000 per month to lead a financially stress-free life. If you’re targeting 70% of current income for retirement, savings is not enough. You should start investing.
The 4 per cent rule
The rule of 4% refers to the withdrawal rate. Regarding this rule, experts further explain that a retiree who invests 50% in bonds and 50% in equity will not outlive the funds if he/she withdraws 4% from the account in the first year. After that, the withdrawal amount is then adjusted as per inflation rate in each year. The rule is based on the assumption that the portfolio should last for at least 30 years.
Start retirement early
It is crucial that retirement planning is initiated as early as possible because it offers the benefit of the power of compounding. It also gives the investors a reasonable amount of time to alter investments if necessary and thus choose the ones that suit their needs.
Going by the 4% golden rule of retirement planning, if you withdraw Rs. 1 lakh in the first year of the retirement, you need to build a corpus of Rs.3 crores. To reach a target such as this, you need to start saving right in your 20s. In fact, you can venture into investments that would fetch high returns due to the power of compounding. Start early:
Many people often invest in a property to secure their future as real estate is known as the safest and best option for a regular income stream. This is common in India. You will find that seniors pledge their real estate property to banks or financial institutions in order to get periodic payments/income, which is also known as a reverse mortgage. The bank uses this property to disburse a loan amount by assessing factors like the demand for property, the current price of the asset, and its condition. The reverse mortgage loan ends when the owner dies or decides to sell the house. If the owner dies, their children can have a right over the property by repaying the loan, or the bank takes the possession. Note that such gains are entirely tax-free.
Stick to your investment plan:
More often than not we tend to deviate from our investment plan to fulfill other goals. Ensure that doesn’t happen when you start financial planning for retirement. Your new dream car or a bigger house can wait but retirement planning cannot. Invest as much as you can afford to and invest in flexible plans, which ensure that you can alter your investment any time during times of dire need. Other than that, the financial goals for retirement should never be tampered with as they become a habit and in turn disturb the investment.
The most important part of Retirement planning is ‘Investing’. Investing for retirement has to be very effective. There are several investment avenues that you can opt for retirement planning.
You have spent years accumulating your retirement fund. What is the best way to draw it down. Your retirement fund may consist of a collection of the following:
- Personal Pensions
- Company Pensions
- Deferred pensions
- Paid up pensions
- Retirement Bonds
There is no right or wrong solution to retiring your fund. Only your solution. Everyone is different with a different set of needs, assets and objectives. We provide a bespoke solution to all of our clients to ensure that you receive the best solution for your specific situation, be it maximum tax-free lump sum or highest possible life time pension.
Exchange Traded Funds (ETFs): Exchange traded funds are considered to be one of the popular securities amongst investors. An Exchange Traded Fund (ETF) is a type of investment that is bought and sold on stock exchanges. It holds assets like commodities, bonds, or stocks. An exchange traded fund is like a mutual fund, but unlike a Mutual Fund, ETFs can be sold at any time during the trading period. Moreover, ETFs helps you to build a diverse portfolio.
Bonds: Bonds are one of the most popular retirement investment options. A bond is a debt security where the buyer/holder initially pays the principal amount for buying the bond from the issuer. The issuer of the bond then pays the holder an interest at regular intervals and also pays the principal amount at the maturity date. Some of the bonds provide good 10-20% p.a.-rate of interest. Also, there is no tax applicable on bonds at the time of investment.
Real Estate: It’s the most preferred retirement investment options amongst investors. It is an investment made in the real estate, i.e. house/shop/site, etc. It’s considered to give good stable returns. To make an investment in real estate, one should consider good location as the key point.
Equity Funds: An equity fund is a type of Mutual Fund that invests mainly in stocks. Equity represents ownership in firms (publicly or privately traded) and the aim of the stock ownership is to participate in the growth of the business over a period of time. The wealth you invest in Equity Funds is regulated by SEBI and they frame policies & norms to ensure that the investor’s money is safe. As equities are ideal for long-term investments, it is one of the best retirement investment options.
New Pension Scheme (NPS) New Pension Scheme is gaining popularity in India as one of the best retirement investment options. NPS is open to all but, is mandatory for all government employees. An investor can deposit a minimum of INR 500 per month or INR 6000 yearly, making it as the most convenient for Indian citizens. Investors can consider NPS as a good idea for their retirement planning because there is no direct tax exemption during the time of withdrawal as the amount is tax-free as per Tax Act, 1961. This scheme is a risk-free investment as it’s backed by the Government of India.
Bank Fixed Deposits: Most people consider the Fixed Deposit investment as a part of their retirement investment options because it enables money to be deposited with banks for a fixed maturity period, ranging from 15 days to five years (& above) and it allows to earn a higher rate of interest than other conventional Savings Account. During the time of maturity, the investor receives a return which is equal to the principal and also the interest earned over the duration of the fixed deposit.
Reverse Mortgage: As a part of the post- retirement investment options, a reverse mortgage is a good option for senior citizens who need a steady flow of income. In a reverse mortgage, stable money is generated from the lender in lieu of the mortgage on their homes. Any house owner who is 60 years of age (and above) is eligible for this. Retired people can live in their property and receive regular payments, until the death. The money receivable from the Bank will depend on the valuation of property, its current price and well as the condition of the property.
Annuity: An annuity is an agreement aimed at generating steady income during retirement. Where a lump sum payment is made by an investor to obtain a certain amount instantly or in future. The minimum age entry for any investor in this scheme is 40 years and the maximum is up to 100 years.
Senior Citizen Saving Schemes (SCSS): As part of the post- retirement investment options, an SCSS is designed for retired people who are above 60 years old. SCSS is available through certified banks as well as the network post offices spread across India. This scheme (or SCSS account) is up to five years, but, upon the maturity, it can be subsequently extended for an additional three years. With this investment, tax exemption is eligible under Section 80C.