The goal of retirement is to try to guarantee a target level of income ideally from retirement till death to ensure that one can maintain pre-retirement standard-of-living.
There are four key questions to be asked before you plan to invest towards your retirement:
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- How much to Save?
- How to Invest?
- How to Rebalance?
- How to Decumulate?
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Factors to Consider Before Constructing Retirement Corpus
There are certain things that you need to pay attention to while constructing your retirement corpus.
Inflation
As we all know, the value of the rupee falls, Inflation is galloping. Food and fuel costs are increasing. Medical expenses are at an all-time high. In fact, medical inflation is higher than general inflation. It is important that your investments are in asset classes that beats inflation.
Apart from rising inflation, there are other financial risks, fluctuating interest rates, stock market volatility. Maintaining your current lifestyle/quality of life is possible if you plan it well in advance.
Regular Income
Conduct a cash flow analysis: Have a baseline for how much you will need each month to pay for your expenses once you retire. You can either invest in an asset that gives you regular income or withdraw from a corpus using a Systematic Withdrawal Plan.
Let us talk numbers. To get a monthly income of Rs.75,000, assuming you get retired at 60 and you need income for the next 25 years, you need a corpus of Rs 2 Crore.
Higher the income, higher will be your corpus requirement.
Post Retirement Goals
You might want to travel the world or give something back to society in the form of charity. Or you might want to build a legacy/wealth and pass it on to your children. There might be other personal goals that are close to your heart which you might want to achieve post-retirement. Take some time to evaluate what it is that you want to do post-retirement and factor in these goals.
Long-Term Vision
What most people do not consider is life after retirement which is around 25 – 30 years with no active income. Hence, you cannot leave such a long time to chance; you need clarity to embark on a strategy. The best way ahead is to have a financial plan in place. Plan your savings with a long-term vision in mind. Invest in asset classes that will do well in the long term and invest in avenues that will give good capital protection. Keep your money in different buckets for different requirements and different goals. This ensures you are well prepared to face anything that comes your way.
Keeping all these in mind, you can construct a stable and diversified retirement corpus.
What Should You Focus On?
Capital Preservation is the key. Keep your principal safe and then worry about returns. Hedging eliminates the risk of loss by sacrificing the potential for gain. Investing in a risk-free asset is the simplest form of hedging.
Investment Options Available
Government Schemes
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- Senior Citizens Savings Scheme
- Pradhan Mantri Vaya Vandana Yojana
- RBI Floating Bonds
- Post-Office Monthly Savings Scheme
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Other Investment Options
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- Fixed Deposits
- Mutual Funds
- Portfolio Management Services
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Government Schemes After Retirement – A Quick Glance
| Particulars | PMVVY | SCSS |
| Scheme | Pradhan Mantri Vaya Vandana Yojana | Senior Citizens Savings Scheme |
| Type | Pension Scheme | Savings scheme with periodic interest pay-out |
| Minimum entry age | 60 (55 or above, if opted for VRS) | 60 (55 or above, if opted for VRS) |
| Term | 10 years | 5 years, can be extended further for 3 years |
| Investment amount | Minimum – 1.5 Lakhs. Up to Rs. 15 Lakhs | Min – Rs. 1000. Up to Rs. 15 Lakhs |
| Returns | Guaranteed 7.40% p.a, payable monthly | 7.40% p.a. Currently (Reset every quarter), payable quarterly |
| Maturity benefits | Purchase price along with final pension instalment shall be payable at the end of 10 years | Principal amount will be payable along with the last interest |
| Premature withdrawal | Premature exit allowed for the treatment of any critical/ terminal illness of self or spouse – Charges @ 2% of Purchase price | Up to 1 year – Not allowed From 1 year – Up to 2 years – Charges @1.5% of the Balance Deposit Amount will be deducted On or After expiry of 2 years – Charges @1% of the Balance Deposit Amount will be deducted |
| Taxation | No 80C Benefit, Pension is taxable | 80C Deduction on investment, Interest is taxable |
| Other benefits | Loan up to 75% of Purchase Price shall be allowed after 3 policy years (to meet the liquidity needs). | - |
| Particulars | RBI Floating Rate Bonds | Post office Monthly Schemes |
| Scheme | RBI Floating Rate BondsPradhan Mantri Vaya Vandana Yojana | Savings Scheme |
| Type | Savings Bonds | Savings scheme with periodic interest pay-out |
| Minimum entry age | - | 60 |
| Term | 7 years from date of Issuance
6 years for Above 60, 5 years for Above 70, 4 years for Above 80, |
5 years |
| Investment amount | Minimum – Rs.1,000. No Maximum Investment | Min – Rs. 1000. Up to Rs. 4.5 Lakhs (Single) Rs. 9Lakhs (Joint) |
| Returns | Floating Interest Rates. 7.15% p. a
Interest rate reset every 6 months. (1st Jan and 1st July |
6.6% p.a. payable monthly |
| Maturity benefits | - | Principal amount will be payable along with the last interest |
| Premature withdrawal | 50% of Interest Due and Payable for last 6 months | Up to 1 year – Not allowed From 1 year – Up to 3 years – Charges @2% of the principal will be deducted 3 years – 5 years – Charges @2% of the principal will be deducted |
| Taxation | Income from the bond is taxable | Interest is taxable |