Retirement Fund

Retirement Fund

Retirement is the period of your life when you are no longer working and you need to fund your day today expenses from your savings. Retirement planning is a part of overall financial planning process and it enables a person to enjoy the desired post retirement lifestyle. When you stop earning, you would certainly want to maintain the same (or even better!) standard of living. Post retirement, a person does not have his monthly paycheck and will have to depend on the annuity he receives from his investment corpus. Planning for the sunset years acquires added importance because people over-estimate what they have and under-estimate how much they need post retirement. People live longer today and are lot healthier today. They spend more years in retirement and therefore they need to save more to cover the risk of living more than their life expectancy. Retired people love pursuing new interests such as playing golf, going abroad etc and therefore post retirement life style is extravagant than those prior to retiring.

When planning for retirement we do not know how much is enough? Although, we can draw up a plan that includes future cash flows, savings and spending assumptions, it is not always possible to accurately assess this corpus amount.

To compute retirement corpus, following variables are considered:

To achieve your life dreams, even when you stop working, one should follow the under mentioned basic principles.

  1. It is a myth that one should start planning for retirement when you are 40 plus. If you start early, you can build large corpus for retirement. Remember the power of compounding!
  2. Define your need and financial objectives.
  3. Seek advice of a financial planner, who shall chalk out a plan for you. A financial planner can guide you to invest in appropriate asset class to build corpus for your retirement.
  4. Diversification and optimal asset allocation in accordance with one’s risk appetite is a key to successful financial and retirement planning.
  5. Review your plan at regular interval to ensure you are on track.

Retirement is an existing time, but it can be a scary one unless you have a retirement plan.

Pension Funds

Pension plans (also referred to as retirement plans) are offered by insurance companies to help individuals build a retirement corpus. On maturity this corpus is invested for generating a regular income stream, which is referred to as pension or annuity. Pension plans are distinct from life insurance plans, which are taken to cover risk in case of an unfortunate event. However, most Pension schemes in the market do have a life cover as well.

Conventional pension plans invest a major portion of the premium monies in bonds and government securities (G-Secs). That is why the returns are on the lower side. And if one were to factor into the equation an annual inflation figure of approximately 5%-6% per annum, then the real return figures look even more unimpressive.

This is where unit linked insurance plans (ULIPs) can play an important role in the retirement planning exercise. ULIPs have a mandate to also invest a portion of the premium in the stock market apart from bonds and G-Secs.

ULIPs have other important benefits like liquidity. You can withdraw money from a ULIP to meet emergencies. Also, you can invest surplus money (i.e. top-ups) over and above the premium amount.

Some insurers have launched capital guarantee ULIPs. Such products aim to guarantee the premiums paid by the individuals (net of expenses) plus the bonus declared, on maturity. Individuals, who fear ‘loss of capital’ in a ULIP, will find such products attractive. However, capital guarantee ULIPs has lower equity exposure which could dampen returns for the aggressive investor.

Expenses loaded are pretty high is most pension scheme. First year expenses can be anywhere between 17% and 22% while second year expenses range between 12% and 15 %.

Many may not be aware that there are two pension products available from mutual funds too. Templeton Pension fund and UTI Pension Fund are pension schemes eligible for 80 C benefits. Both are a mix of debt and equity. They are pure investments schemes .i.e. do not have a life cover attached. The expenses loaded on these schemes are much lower than that of pension schemes offered by Insurance Companies.

Since Pension Products are long term in nature a predominant equity exposure is always preferable. Also starting early is the key. The younger you are, the lesser you will need to keep aside for the same retirement corpus.

Up to one third of the maturity amount, which can be withdrawn, is treated as tax free in the hands of the individual. The pension, from the remaining two-thirds amount, is taxed according to the marginal rate of tax.