Saving for retirement is a top priority for all. Saving for retirement ensures that you have enough money to enjoy the same standard of living even after you stop earning. It is important to cover monthly expenses, medical expenditures, account for inflation, deal with uncertainties, among others post retirement. To save for retirementthere are different investment avenuesavailable including mutual funds, PPF, insurance plan, etc.
PPF (Public Provident Fund)
Public Provident Fund, popularly known as PPF is a saving scheme backed by the government.It earns a fixed interest rate that is set by the government every year combined with tax-saving benefit. PPF comes with a lock-in period of 15 years with current interest rate of 7.90%. This is however lower than last year (March 2019) when it was 8%.
The average life expectancy has increased as people have access to affordable and better healthcare.Thus, life insurance becomes a necessary part of retirement planning but it cannot be considered a major contributor towards it. Retirement phase needs a regular flow of money to meet expenses which is not a characteristic of an insurance plan. Insurance plans are meant to fulfil the purpose of uncertainties in life and not regular expenses.
Investment in mutual fund helps to build a corpus over a period of time through investment in equity, debt or hybrid funds. While investing in mutual funds, investing at an early age is important to build a sizeable corpus for retirement. Asset allocation plays an important role in retirement planning.
During the early years, a higher portion of the investment amount should be allocated towards equity funds. At the early stages of life, your risk-taking ability is higher which is why allocation to equity should be higher as the risk involved in equities get spread over a long period of time. Allocation to other categories such as hybrid and debt funds can be considered as you progress in age. This is because your risk-taking ability reduces over time. Also, remember to revisit your portfolio of mutual fund schemes from time to time to ensure that you can keep track of your investment plans and make changes to the asset allocation, if need be.
Closer to retirement, you should move a large portion of your investments into debt funds and post-retirement move all assets into debt for higher safety of capital. Equity in the short-term can be volatile and therefore comparatively riskier.
During the retirement years, you can use the SWP, or Systematic Withdrawal Plan, facility wherein you can,on a regular basis, withdraw a pre-determined amount of money from your mutual fund investment corpus that you have built over the long time. This could act as your salary during the retirement years.
Start Retirement Planning Now
Retirement planning is essential, something a lot of people do not think about until much later in their life. At that point of time, it becomes difficult to build a large corpus as the investment amount required is much higher. Further, the potential of growth of the investments is also lower as your investments are likely to be skewed more in favour of debt funds where returns are comparatively lower. It will help protect the capital but wealth-building capacity could be lower.
Therefore, start your retirement planning now, irrespective of the life stage you belong to. Better late than sorry!