Retirement planning is all about risk management. How much risk you are willing to bear for higher returns? Higher Risk = Higher Returns and vice versa. Being comfortable with risk in portfolio and enjoying an adventurous style of investing could mean inflation-beating returns from your retirement portfolio. If you are comfortable with a conservative approach, expect a smaller portfolio at retirement.
Get equities in that retirement portfolio:
An investment in equity mutual funds and stocks gives your retirement portfolio that extra kick. Invest in a diversified equity fund which invests in stocks across sectors. Diversification protects the investment and you earn higher returns with time. Investments in Equities are safe over the long-term, making it an excellent inclusion in that retirement portfolio.
Start building that retirement portfolio, right from the first salary of your first job. Invest in equity mutual funds via SIPs. SIPs are not mutual funds, but a method of investing in mutual funds. You invest a certain pre-determined amount at regular intervals of time like daily, weekly, monthly and so on. SIPs encourage disciplined investing and you enjoy the compounding benefit of return on return. This makes SIPs an excellent way of investing in equity mutual funds for that retirement portfolio.
Never forget to include ELSS in your retirement portfolio. Equity Linked Saving Scheme popularly called ELSS is a tax saving mutual fund, which invests most of your money in stocks and has a compulsory lock-in of 3 years. Your investment in ELSS enjoys Section 80C benefit up to Rs 1.5 Lakhs a year. Include ELSS in the retirement portfolio and stick with them till retirement.
Fixed Income for that retirement portfolio:
A conservative investor must include fixed income in the portfolio. Invest in FDs, PPF, Company Deposits, Government Securities and tax-free bonds for retirement. Some of these investments enjoy a Sovereign Guarantee and are backed by the Government.
Your retirement portfolio must include fixed deposits which are a liquid investment, quite safe and pay interest of around 6.5-7% a year. Park some money in FDs in that retirement portfolio to meet any emergency. PPF has a lock-in of 15 years and offers 7.6% from July 1st
2018. You also enjoy the EEE benefit where your investment in PPF enjoys the Section 80C benefit up to Rs 1.5 Lakhs a year. Interest earned and withdrawals at maturity are tax-free.
Company deposits give higher returns compared to FDs, but are more risky. Invest in AAA rated Company Fixed Deposits for the retirement portfolio. Include debt funds in the retirement portfolio. Debt funds are more tax-efficient compared to fixed deposits and must be included in the retirement portfolio, if you fall in the higher tax bracket. Tax-free bonds mature after 15-20 years and can be included in the retirement portfolio. Interest is tax-free with higher returns if you fall in the 20 or 30% tax bracket.
Avail health insurance
Insurance is all about protecting assets and saving wealth. You must avail a health insurance plan to protect the retirement portfolio. Hospitalization is costly and a medical emergency can decimate the retirement portfolio.
Avail a health insurance plan at a young age, as health issues may crop up later in life. Health insurance is expensive as you grow older. Health insurance is about protecting the retirement portfolio and not about returns.
Get your own home
Invest in a house to enjoy a secure retirement. Avail a home loan if you must, to buy the dream home. Get rid of any debt or encumbrances on your home as quickly as possible. Owning a house in retirement gives stability and peace of mind.
You can opt for reverse mortgage, if money is not sufficient in retirement. Reverse mortgage is the opposite of a home loan. A senior citizen gets regular income from a bank on mortgaging the house. He can enjoy periodic payments and reside on the property till he dies.
Invest in NPS for a secure retirement
You cannot rely only on EPF for retirement. Consider the National Pension Scheme (NPS), which helps in long-term savings for retirement. You can invest in the NPS till 60.
NPS invests a maximum of 50% in equity and offers higher returns on a retirement portfolio. At retirement you can withdraw 60% of the corpus, but you have to invest the remaining 40% in an annuity product. If you want a regular pension in retirement, do look at NPS in the retirement portfolio. NPS discourages an early exit and on doing so, you get only 20% of the corpus. The remaining 80% must be compulsorily annuitized.
Add NPS to the retirement portfolio, only if you are comfortable with equity and not just for the tax benefits. Be sure on how much you want to invest and remember that NPS does not allow partial withdrawals.
Be Wise, Get Rich.
The author, C.S. Sudheer is CEO and founder of IndianMoney.com