"May you live a hundred years," your grandmother would often pray. The demographic statistics have been improving in tune. The life expectancy ratio has steeply climbed to 68.3 years for children born in 2015, from 58 years in 1990, as per World Health Organisation statistics, thanks to advances in medicine.
Whether you possess a long-life toe or not, financial preparation for the silvers is better done early to ensure your money works harder than you do. This is because if you need to build a kitty of ₹7 crore for retirement and start accumulating at the age of 25 years, you would need to save ₹11,000. Delay it by 5 years, and you would have to cough up double the sum to reach the goal.
The sufficient retirement kitty is quintessential considering that the working life of the generation Y has been shrinking, while social media exposure forces them into an elaborate lifestyle due to peer pressure.
The first step to retirement planning would be to find out the amount you need to accumulate. Retirement calculators available on several financial websites should be able to throw up the golden figure based on your needs.
Don't forget to build in the erosion resulting from inflation. To estimate the impact, understand that a monthly expense of ₹50,000 snowballs to ₹2.17 lakh over a period of 10 years if inflation inches ahead by 7% each year.
Choosing the right investment vehicle is critical so that you don't outlive your retirement kitty. Apart from the traditional options of bank deposits and PPF; bonds, corporate deposits, life insurance plans, mutual funds and government schemes such as NPS are some of the investment opportunities you should explore.
A new option of National Pension Scheme (NPS) has emerged, where one can invest in a combination of equity and debt, with the equity exposure automatically tapering as one nears retirement. One need not balance the portfolio with age. This can be explored instead of PPF as it also offers additional tax benefits on income up to ₹50,000. Over the past five years, NPS has generated 10-16% returns based on the debt and equity combination and the fund manager opted for.
However, the maturity of NPS isn't completely tax-free like PPF in the current form. After maturity at the age of 60, one needs to compulsorily purchase an annuity – a plan that offers regular pension.
For those exploring comparatively safe long-term investment options, bonds are the best bet, offering assured returns over 10, 15 or 20 years. These bonds are generally issued by government or related entities such as REC, PTC, HUDCO, etc., and thus have very low default risk. These bonds are even traded on the exchanges offering an early exit option, wherein one would have to forego returns partially. The interest earned on these bonds is exempt from income tax.
From aggressive risk-takers to moderate and conservative investors, there are a host of fund options available on the mutual fund platter. You can opt for debt-only, debt-and-equity combination in balanced funds, or diversified equity funds to build your retirement savings. Remember that debt is like walking the savings path with your sports shoes on, which would be fraught with fewer falls but would lead you ahead slowly. Equity investments, on the other hand, would be similar to skates, which can help you reach the destination faster with higher returns and nil tax (if held for more than a year), but are punctuated with the dangers of slipping and major falls.
Dynamic Bond and income funds have generated 9-10.5% returns over the past one year while the equity diversified category has garnered 27% over the past one year. In the long term, equity diversified funds generated 19% on an average over the past 5 years.
Retirement funds are also available with select fund houses, which offer tax benefits under Section 80 C at the time of investing. Though these funds have a five-year lock-in period and a 1% exit load if redeemed before the age of 60, one isn't forced to purchase annuity from the maturity corpus.
Life Insurance plans
You can choose from endowment to unit-linked plans offered under the insurance umbrella. There are money back plans which offer assured maturity value. Unit-linked insurance plans offer benefits based on the fund type selected and offer a small life risk cover (an amount paid in case of death of policy holder). Traditional pension plans invest in government securities, while a unit-linked retirement invests in a combination of stocks, bonds, securities, etc.
One has the option to pay the premium at regular frequency such as yearly, half yearly, monthly, while some plans are even offer a single premium option.
But going for products, which have retirement and pension as their nomenclature, isn't a norm. You can build a portfolio of age-appropriate diversified assets including real-estate and gold. An ideal mix for those in their 20s would be an aggressive 85-100% in equities, 15% debt and 5% in gold or alternate investment seeking higher growth during the early years. As one ages, the proportion of equity can be tapered down to 65-85% equity, 35-15% debt between 45 to 60 years to preserve the savings and finally 0-35% equity against 65-100% debt during the retirement period as one withdraws for monthly needs.
Plan to build a bulky nest egg and you can live the life of Riley in your silvers too.