When it comes to investing for retirement, your options have expanded manifold in the last three decades. Whether equity and debt mutual fund schemes, or National Pension Scheme (NPS), direct stocks, or even the entire gamut of insurance-linked investments; the options are many.
How does one filter through all these choices and pick the ones which work best? Your retirement investment allocation can change and shift over time, especially closer to retiring.
Everyone has different retirement needs
Every individual’s retirement investment selection will differ. It depends not just on income but also on inheritance. For example, if you live in an owned (non-leveraged) property or have inherited property from your parents or ancestors, that is one less expense to plan for within your retirement corpus.
For the rest of your retirement investment, the basic ask should be to invest in securities where you are likely to earn above-inflation growth over time. This is ideally suited for equity-linked investments and you have a few options there.
Investing directly in stocks is best suited to those who understand the nuances of stock picking and are able to filter through to the quality stocks.
For all others, who neither have the time nor the inclination towards stock picking, managed funds work best.
Within managed funds, equity mutual funds have the most transparent, flexible, cost-effective and easy to use structure. You, however, have to pay 10% long term capital gains tax on gains in excess of a lakh.
Insurance-linked funds are the most tax-efficient. They are not transparent though. Costs are hazy and switching from one manager to another over the years is not viable.
NPS is also a well-managed, low-cost option, but you have to necessarily opt for a partial annuity which is taxable.
Ideally, a regular investment strategy with a mix of different types of equity mutual funds should help you generate the growth needed for your retirement kitty.
If you want to create an annuity post-retirement. Structure an appropriate systematic withdrawal plan from your accumulated equity mutual fund corpus. It would be wise to move the corpus needed in the next 2-5 years immediately post-retirement, into more stable return products.
Retain some allocation to equity, as you will want your money to keep growing above inflation.
Retirement can extend to 25-30 years and you want to ensure that your money lasts till the end.
If equity-related risk and volatility are not suitable to your behaviour and temperament, a choice of government bonds, fixed deposits and provident fund investments will work best.
How long till retirement?
Your choice of investment will also depend on how long you have till you retire.
For suitable compounding through equity investments, you need a minimum of 7-10 years prior to your retirement.
Closer to two years from the actual date, move some of your expenses needed in the first few years into stable growth investments like debt funds or fixed deposits.
This way you can focus on capital preservation where required and leave the rest to grow for the next two to three decades of retirement, withdrawing only what you need on a regular basis.
If you have less than five years to retirement, going aggressively into market-linked equity investments may prove risky. Keep the money needed for the first 2-5 years of retirement in stable return options like fixed deposits.
The rest can be invested in equity investment options.
Along with the investments, a good, cost-effective health insurance policy will also help.
Optimizing risk and return balance in your retirement portfolio is important. This will ensure you spend your retired life in peace without being dependent on others for your needs and desires.
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