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Research
Retirement Planning Demystified
Mutual Fund Live

Question from a Financial Advisor (FA): Have you started planning for your post-retirement? 

Most common answers financial advisors come across: I am only 30. It is too early to think about retirement. 

Someone in their late 40s / early 50swould defer their planning to after their children settle down in life. 

This complacent attitude can land your clients in serious trouble once they retire. As a financial advisor, highlight this attitude and explain the consequences. 

Explain it to your client that if s/he’s (assuming they are 30 years old) monthly expense is Rs 30,000 today, they will need Rs 1.80 lakh per month when they retire 30 years from now, assuming that the annual inflation rate is 6%. 

But for a client who is 45 years old, you will have to explain that they have only 15 years to accumulate Rs 1.80 lakh to lead a similar life. Saving for this purpose will be tougher for a 45-year-old than for a 30-year-old. 

Suggestions Financial Advisors should make

Start today: Tell your client earlier they start investing the better it is. Let them start small, they can increase their contribution gradually but they should not procrastinate.Most people start planning only when in their 40s.Financial advisors must help change this habit.

Show the numbers: If a 25-year-old invests Rs 5,000 a month then by his retirement, he will accumulate Rs.3.24 crore. If he starts investing at the age of 35, then he will save Rs.94.88 lakh. Further, if he starts at 40, then he will save only Rs.50 lakh. 

Invest systematically: Explains why equity is the best tool for long-term investment. Equity is the only product which can beat inflation. Recommend systematic investment in equity mutual funds. Your client will not only earn higher returns, accumulate wealth but will also develop a habit of saving regularly.Also, long term capital gains from equity mutual funds are totally tax-free after one year.

Do not redeem: You should tell your client to resist the urge of withdrawing from this kitty. Tell them to invest in their retirement corpus and let the power of compounding do its work. 

Portfolio
Remember retirement planning cannot be same for everyone. It should differ according to the age of your client.

Age 18-25 years: These individuals start their career and have no liabilities. They may not earn much but they have age on their side. So, advice maximum exposure to equities. Recommend a portfolio mix of 85% equity, 10% debt, and 5% gold.

Age 26-35 years: This is when income and liabilities increase. But they still have time for retirement and can take exposure to equities. However, advised higher debt investments to hedge against risk. An ideal equity, debt and gold mix should be 70:20:10.

Age 36-45 years: Here, liabilities increase faster than income. Hence, these individuals need higher exposure to debt --- PPF, EPF and debt funds. Advise 60% exposure to equities (large-cap equity funds); debt and gold can be 35% and 5%, respectively.

46-55 years: These individuals may be 5-15 years from retirement and need to protect the corpus from volatility. You can recommend a 50:50 debt-equity mix.

We have covered up various other options of retirement planning separately. Please click here to read more.

Post-retirement Planning
Allocate your client’s money to ensure both regular income and investment safety. Retirees must not have more than 30% exposure to equities and ensure portfolio is liquid.

Investment options for retirees:

Senior Citizen Savings Scheme: 
 Meant for those who are 60 or above; investment tenure is 5 years
  Annual return is 8.6%; interest is subject to TDS
  Invest between Rs 1,000 and Rs 15 lakh; eligible for tax deduction 
•         Premature redemption is allowed after one year

Post-office monthly income schemes: 
  Invest between Rs 1,500 and Rs 4.5 lakh for 6 years
  Rate of return is 7.8%; interest is subject to TDS
  Banks also offer MIS for 12-60 months, pay prevailing bank deposit rate

Debt Mutual Funds: 

Monthly Income Plans (MIPs) are debt-oriented hybrid funds with 80-85% allocation to fixed income securities (bonds and treasury bills), and the rest to equities. This gives the safety of debt funds and the edge of equity returns.

Debt funds can be advised once the wealth accumulation phase is over. As your client approaches retirement, advice them to shift their investment gradually into debt funds via Systematic Transfer Plan (STP). This should start 2-3 years before retirement. Shifting is important because equity investments are risky, and one cannot afford to risk their saved corpus. Post retirement, your clients can withdraw specific amounts periodically via Systematic Withdrawal Plan (SWP). 

One can also invest in fixed maturity plans and liquid-plus schemes of mutual funds. 

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