Investing for retirement is a long term process which requires discipline and regular savings. Savings for retirement is important but investing wisely is more important so as to build a corpus for smooth second life.
One of the fears in retirement planning is outliving their savings; which is true as many retirees face this. Growing cost of living and health care, improved life expectancy, inflation are main factors behind this fear. Long Term and old age products like PPF, Employer sponsored plans alone not adequate to bear the effects of this; so you have to add novel options to your retirement portfolio.
Choosing products for retirement planning depends mainly on three factors:
1. Goals / Objectives
2. Rate of Return
Risk taking ability can also affect this decision.
One simple thing to follow in any investment is that “invest your money in the plan/product which is simple to understand”. In other words, if you don’t understand the product; don’t go for it. Often investors end up with the products which don’t serve their purpose or mainly due to confusion and miss-selling.
Following are some products which can be used for retirement planning:
Insurance is not an investment; but a necessity. It’s a product which insures your risk or loss. It replaces the loss fully or partially, which you cannot afford to bring back. For example, if you have dependents then replacement of that income in case of an unfortunate event is the purpose behind buying an insurance policy. Your dependents can not replace you and your income, therefore in such case insurance is a necessary.
Insurance is most vital part of retirement planning. But you have to decide which risk you want to insure. Generally, in retirement planning Life and health insurance are the major ones.
Term life insurance is the best as it is cost effective and simple product for any retirement plan. Some insurance policies are sold under the tag of “saving for retirement”. But as I said insurance is not an investment and investing under name of insurance can cost you more. Covering health risks with insurance is also important. Health care costs is increasing even at more rapid rate than inflation. Buying health insurance at earlier age is always beneficial as it costs more with increasing age. Even if your employer provides your health insurance facility, it is advisable to have another Medical policy.
It’s a product by insurance company through which you can accumulate funds by investing regularly for some fixed number of years and then use this accumulated fund against regular income after retirement.
There are two types of annuities namely deferred and immediate.
Deferred annuity is most popular and sold by most of insurance companies in India. Immediate annuities, which is not so prevalent, has no accumulation phase. You can purchase the immediate annuity with a lump sum amount and can receive payments within a year. Investing in an annuity mostly depend on your age, personal and financial position. Most of the time annuities are taken as tax saving product in India rather than retirement plan but it has many disadvantages too. Your contribution to annuity plan is not taxed at investment but post retirement when you need your income earnings are taxable! Its liquidity is low and is expensive investment.
There are some other options you can choose from such as SIP in a diversified mutual fund, post office schemes, or fixed income securities which can give benefit of accumulation, tax and are also cost effective!
Investing in shares for retirement is certainly a good idea. Some portion of your investments in stocks can give you excellent returns over long run. Investing in blue chip / large cap securities helps you earn good yields and also helps to minimize the inflation effect. Set some limits on your share purchases according to your risk appetite. Invest for long term and do your homework before buying stocks.
If you don’t want to take risks by investing directly in stock market you can go for mutual fund investments. Mutual fund offers some great advantages like diversification, low risk, professional money management etc. You not only can choose option for shares but also for bonds/interest instruments also through mutual funds. A great option where you can actually invest according to your financial goals and objectives. Just be careful before going for mutual fund scheme and do align your goals and objectives with schemes objectives.
It’s a very good product launched by Pension Fund Regulatory & Development Authority (PFRDA). A very well-regulated, flexible and cost effective product for retirement planning. It also offer tax benefit under section 80 CCD (2). A simple product designed especially for retirement planning purpose.
Real Estate and Gold:
Real estate investment is another option for retirement planning. It is the best bolster you can use to fight inflation. Only disadvantage is its “non-liquidity”, but in terms of return, growth and value appreciation, no other option can beat it. Gold is another investment you can go for. In India, many people purchase gold for “Marriage” planning. But you can also invest it for retirement purpose.
So, consider these options when you are planning for your retirement, remember it’s your second innings and you must live with respect! Be wise!
See you next time 🙂