What does the word “Retirement” means to you?
It is a smile on some people’s faces while a frown on others’. While the former category of individuals find comfort in the fact that the daily stress of working life comes to an end, the latter worry about the associated lack of income.
Their worry is justified and only through proper financial planning can the frown be converted to a smile. Planning for retirement is a very important task in today’s age where financial independence even after retirement is mandatory. Gone are the days when working for one company for your entire lifetime ensured a decent pension amount to take care of the finances post-retirement. Today, changing jobs is a common phenomenon and one cannot expect a pension from the changing employers. Thus, if you are looking for a comfortable retirement, you need to have a foolproof financial plan for your golden years. Have you planned for your retirement? If yes, is your plan foolproof?
A Retirement Readiness Survey conducted by AEGON Religare Life Insurance Company depicted that among a list of financial instruments available, Life Insurance plans and bank FD schemes emerged as top winners with a percentage of 63% and 62% as retirement planning instruments. Provident Fund followed closely behind with a 50% choice while mutual funds, NPS, property and gold had a following somewhere in the 40% to 43% area. Do these investment choices guarantee the best retirement portfolio?
Two points deserve consideration when you are thinking of your retirement portfolio which is –
- Taxation – do not forget the impact of tax when building a retirement portfolio. As is common with many investment options, the returns are taxed thereby providing very minimal tax-adjusted returns on your investments. Pension plans from life insurance companies are taxable in respect of the pension payable while FDs are tax-free only if they are deposited for a minimum tenure of 5 years. After you retire, you require your investments to yield the maximum possible returns which will be tax-free.
- Inflation- Even if your life insurance plans, fixed deposits, or Provident funds provide you with tax-free returns; do they reflect inflation-adjusted returns? At the rate the inflation is growing in today’s age, you wouldn’t want to end up with a corpus which has no real value post-retirement, would you?
What is the solution?
Mutual funds are gaining popularity among investors because of the attractive returns they promise and also because of the inherent tax exemption on the returns. For your retirement planning, equity mutual funds are the ideal solution and though they feature quite low on the people’s perception list, they are your best bet. On the tax front, whenever redeemed after a period of 1 year, these funds are entirely tax-free. Being a market-linked fund, the returns are always in trend with the inflation index thus fulfilling the second requirement too.
How to build a tax-free inflation-adjusted portfolio?
Invest in a Systematic Investment Plan (SIP) of an equity mutual fund and hold on to your investments for at least a year or longer. When you want to avail of your income post-retirement, opt for a Systematic Withdrawal Plan (SWP) wherein the returns from your corpus would be payable to you every month systematically. Such returns would be tax-free and would sufficiently provide for your lifestyle expenses post-retirement. The corpus itself would keep growing at 12-15%, which is definitely more than the inflation figures and the entire amount is tax-free!
This is how one can successfully build a tax-free inflation-proof pension for one’s happy retirement life!
Provident funds seem attractive because of the tax-free returns but they fall short when the inflation factor is measured in. Unit Linked Pension plans from life insurers provide inflation-proof returns but the money is locked in for a longer tenure and even the pension received is taxable. Equity mutual funds are the best solution as they are free from tax incidence, inflation-adjusted and even have the lowest lock-in period of one year. So what are you thinking about? Build your retirement portfolio and don’t forget to make it fool-proof!
