Plan early and follow your financial goals to nurture the fountain of youth right through your sunset years

Nikhil Somani, a 25-year old engineer working for a reputed Indian company, is a firm believer in financial planning and is already making regular investments for his immediate goals that include buying a car (in the next two years) and a home (in the next five years). And he vows to follow these financial plans religiously in order to meet all the goals. Just like any other average Indian, Somani too wants to retire at 55 and lead a comfortable life thereafter. More importantly, he has planned for it too and is investing 10,000 p.m. towards it. However, Somani is an isolated case and most youngsters keep postponing their retirement planning.

"Many a times, investors are tied down with meeting short-term goals like wedding, buying a house and keep postponing retirement planning," says Anup Bhaiya, MD and CEO, Money Honey Financial Services. And the solution is to do the financial planning in a holistic way. Remember, retirement planning is a subset of your overall financial planning.

START EARLY

There is another advantage of starting early that is known as the power of compounding (i.e., the money you save in the initial years generates compounded returns for a very long time). For example, to reach a retirement corpus of 1 crore, at 12% rate of interest, you will have to invest Rs. 43,471 per month if you have only 10 years in hand. But if you have 35 years in hand, you will reach the same target by investing just ` 1,555 per month. In other words, the 20s and 30s are probably the best time to plan for retirement - of course, along with other financial and career goals.

EQUITY ROUTE

The first thing that you need to decide is what corpus you would need at the time of retirement. "It is important to first quantify how much you will need to maintain your lifestyle at the time of retirement," says Amar Pandit, CEO of My Financial Advisor. Quantify how much you need to spend to enjoy your current lifestyle. Assuming inflation in the 6-8% range in the long run, you can arrive at the amount you need at the time you retire. Very high inflation on the one hand and the absence of a social security system on the other hand makes maintaining your lifestyle post retirement a big challenge. Therefore, it is imperative that the retirement corpus has to be invested in products that can generate maximum returns in long term. It is proved historically that equity generates maximum returns among all asset classes, so investors can use the equity funds/balanced funds to build their retirement corpus.

EQUITY FUNDS

Though you can invest directly in the stock market to generate your retirement corpus, the mutual fund route is more convenient. "The mutual fund route is more transparent and comes with the least costs. It also offers liquidity, making it a good candidate for long-term investment," points out a wealth manager with a foreign bank.

BUILD A PORTFOLIO

"Depending on where you stand today and your risk-taking ability, you should construct a portfolio of funds with a long-term consistent track record," explains Pandit. Most financial planners recommend diversified equity funds if you have more than 20 years to go for your retirement. Since Somani has full 30 years to retire, his retirement plan can be made of three equity mutual funds. "We recommended him to invest 10,000 per month through SIPs in three equity mutual funds namely, HDFC Equity Fund, Franklin Prima Fund and DSP Equity Fund," says Bhaiya of Money Honey Financial Services.

The assumption here is simple. Assuming a 15% return from equities per annum for the next 30 years, 10,000 per month invested will give him a corpus of 6.92 crore. Assuming that Somani will shift his corpus entirely to debt at that age, and earn a 6% post-tax return, his interest income would be 3.46 lakh per month. Now, we come to the expense part. Somani's current monthly expense is 30,000 per month. Assuming a 8% inflation, at the age of 55, his monthly ex-penses would be 3.02 lakh comfortably helping him retire peacefully. Depending your risk-taking ability, you can either go for an actively managed mid cap funds (i.e., for high risk takers) or go with a plain-vanilla index fund (ie for low risk takers).

BALANCED FUNDS

"Balanced funds also make good candidates for retirement planning since they offer good post-tax returns in the long term," says Abhishek Gupta, a certified financial advisor with Mumbai-based Moat Wealth Advisors. This is because if the average equity component is kept above 65% (most of these balanced funds do it), there is no capital gains tax after a year of holding. He prefers HDFC Prudence Fund and Birla Sunlife 95 Fund amongst the balanced fund category.

ASSET ALLOCATION FUNDS

Asset allocation funds (where the fund managers move between equity and debt depending on the mar-ket conditions) are another option that can be considered. But not all financial planners prefer to go with these readymade tools. "Being fund of funds, the asset allocation funds are treated like debt funds and taxed accordingly," points out Gupta. Instead, it makes sense to invest in the right combination of equity and debt funds and generate better post-tax returns than the fund of fund route.

MANAGE THE CORPUS

Building a retirement corpus is just one part of the game, managing the corpus post retirement is another ball game. The first part is to reduce the high-risk equity component slowly. "As you move closer to your retirement age, i.e., when you are 5-7 years away, shift the corpus gradually into hybrid products," says Vishal Dhawan of Plan Ahead Wealth Advisors. The next step is the use of systematic withdrawal plans (SWPs) offered by mutual funds to reduce your tax burden in the golden days. Please note that systematic withdrawal plan will ensure that the money in your hand is subject to capital gains tax whereas a pension income generated from other products is added to your income and taxed at the marginal rate.

Source: http://epaper.timesofindia.com/