Retirement is seven days weekend per week with zero income. After retirement, we have expenses but since we are not working, income generation stops. Retirement planning is therefore important to ensure income generation during retired life. Idea is to generate passive income streams like interests, dividends, rental income, pension, and annuity etc which exceed the estimated expenses during the retired life. The primary theme behind this passive income generation is to accumulate a portfolio of assets which are sufficiently liquid, safe, and secure and at the same time tax efficient.
Retirement planning can be started at any stage of working life but it always pays to start as early as possible given the uncertainty of jobs in current market conditions. As one ages, the saving potential increases but so does the financial commitment towards children and aging parents. This is the time when the retirement plan should not get amended or changed. Sustained contribution and not dipping into the retirement corpus every now and then is a key to building the retirement corpus. Read More
The revenue generating assets should be collection of various liquid, fixed, equity, debt, physical, tax efficient assets. All these features are not possible in one asset class so portfolio should be designed which has all these features. An ideal asset portfolio should be a diversified across mutual funds, real estate, fixed deposits, insurance plans and EPF. As one ages the portfolio should move more into safer and liquid funds.
One needs to take into account various parameters which are uncertain while making this plan, inflation now and post retirement, estimated cost of living post retirement, expected return on retirement portfolio, time available to build this portfolio, and time it shall be used post retirement.
To avail standard tax deduction under section u/c 80C one make investment in PF, PPF, Insurances and ELSS etc., the motivation here is not retirement planning rather tax saving, as a result this investment then becomes part of the retirement plan or “saving for future” plan. The retirement planning should be such that it takes care of your investments and tax optimisation during your accumulation stage. Investment must not be a mere outcome of need to save tax. For example there are Retirement Pension mutual funds which also qualify for full ₹.150,000 limit U/S 80C tax exemption alongside PF, PPF, ELSS and insurance. Also during ones working life often insurances are bought with the objective of making investments, another incorrect choice if relied solely on this method of retirement planning.
As one approaches the retirement age the accumulated wealth is expected to grow and it should reach a substantial amount to take care of the post retirement expenses. There are various pension plans offered by Insurance companies, PPF, Mutual fund houses etc. Investment in multiple real estates in anticipation of rental income to take care of post retirement expenses is another inadequate income generating asset class if relied upon solely.
After retirement, the types of cost that may be incurred change from sports and gym to medical cost and frequent hospital trips. At old age, although health insurances are available, they come with their own disclaimers on pre-existing diseases therefore one critical component is setting aside, medical corpus.
We at SIPfund.com will help you in designing this portfolio using mutual funds and insurance products. Read Less