WHAT ARE THE INVESTMENT OPTIONS AVAILABLE FOR PLANNING RETIREMENT?

There are ready-made investmentplans for retirement planning and one can simply use them but not depend on them fully.

EPF: Is employee provident fund which everybody knows and it accumulates as your working life continues. Often we would dip into this pot and withdraw the money when we change the job, idea is to let the pot grow and therefore avoid withdrawal, and you will get around 8.65% return on the corpus. There is compounding effect and interest on interest gets added to your principal. This is essentially a debt investment and probably the safest. The returns are tax free at the time of retirement but it’s seldom enough, the corpus it accumulates may not be sufficient to last the entire retired life. However of late the income tax department has disallowed tax free treatment to interest earned on the corpus after contribution from employee and employer has stopped. This is one area of taxation which may change in next twenty years are we are looking at a long time horizon.

NPS: Is another government led retirement planning mechanism where you get a choice of investing in debt and equity but it has its limitation in terms of forcing you to buy annuity of 60% of corpus at the age of 60 and also annuity income is taxed. You can never really withdraw the full sum. This is a mechanism effectively such that you contribute till you are 60 and get 40% lumpsum and 60% you are forced to buy annuity.

Readymade Retirement Plans: Insurance companies and mutual fund houses offer some readymade retirement plans. There are insurance pension plans which promise ₹30,000 per month after 60 years if you pay premium for 10 years etc. If you put them in calculation sheet then you will see that these are low return instruments which yield low income after retirement, also some of these annuities are again taxable. Most of them however don’t start income till the age of 60. So, these may not be sufficient, you can take some of them but they can be simply add on investments and we should not base entire plan on these schemes.

Retirement Age is Decreasing: Also nowadays retirement at 60 is obsolete, people may be either retire early or forced to do so, as technology changes, type of work changes and may be even early burnout since normal working hours of 12-14 hrs is becoming normal. In such cases you are at risk of retiring early and not having enough corpus to sustain till age of 60 because you invested everything in the readymade retirement plans which will only start at the age of 60.

Real Estate for Retirement: This is one asset category which is often looked as a natural choice for retirement. One expects the rental income to take care of the living expenses post retirement. Some even go overboard and buy many such real estate assets to multiply the rental income. Two issues with this strategy are; return on investment is less than 5% now because residential rental yields are lower than 5% in India and the rent is fully taxable. Secondly there is no liquidity in this asset class so in case of emergency there is no liquidity to fall back on.

One should have portfolio of assets and the focus should be more on growth in accumulation stage and on liquidity and stability once retired.

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