In this article
- Why Are Retirement Concerns?
- Importance of Retirement Planning
- Retirement Mutual Fund Planning
- Why Retirement Planning With Mutual Funds?
Why Are Retirement Concerns?
Retirement is a goal for many. But as usual, retirement as a goal always gets pushed for the future. You realize that it is important but not urgent. It is easy to believe that you have years to go before you retire.
But one day you wake up and realize you’re much older and much closer to retirement than you thought you were.
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Importance of Retirement Planning
If you haven’t been able to get motivated about putting money away for retirement, we have something that may help.
1. You Are on Your Own
What if you quit your job for 6 months? Can you imagine how your life would turn out to be? What would be your spending pattern? What expenses would you avoid? How would you reduce your monthly cash burn? What kind of financial support would you get from your friends and family?
You will soon realize, you are on your own. And trust me, the post-retirement life is much longer than 6 months. Remember, how you spend today is as critical as how you save for tomorrow.
2. Cash Flow Strategies For Retirement
After retirement, you will need money for your daily expenses and for dealing with emergencies. You may be able to manage your finances without a hassle if you earn a good salary.
If you know exactly where and how you should spend your money, it will allow you to see the difference between an enjoyable and well-funded retirement and eating cracker and ketchup for dinner.
3. You Will Get Old
Growing old is not an option. We don’t have a choice. But we do have the choice to model our lives in such a way that will give us healthy returns after we retire.
After all, the only person who will take care of YOU tomorrow, is YOU.
4. Put Yourself First
Why would you wake up in the morning, not do what you want with your day, go to work for 8, 9, or 10 hour shifts, commute long distances then do it all over again? And why would you do this for 5 days a week, 12 months of the year?
Most people pay everyone else before themselves: the government, creditors, bill collectors, etcetera. That system stinks and is designed for you to fail financially.
It’s too tough for you to get rich if you’re paying everybody else first. You need to do something about this and redirect your income in such a way that the first person who gets paid is you.
5. Early Headstart
Accumulating for Retirement is a long-term game. It needs discipline and consistent investment.
Regular investment for the long term not only reduces the market risk, but also boosts your return on investment over time. Letting your money work for you is a key component of saving up for retirement.
You will be amazed by the magic of compound interest.
For Example: Let’s say you invested ₹1 lakh in 2007. If you get a return of 10% every year, you’d have nearly ₹2,60,000 after 10 years.
Further, if you continued earning the same interest for another 10 years, you’d have ₹6,72,000 in 2027! That is the magic of compounding. The growth of the initially invested amount increases with time.
6.Save Little by Little
Well, we don’t expect you to save a hefty amount at once, start saving little by little. There are various retirement schemes in which you can invest starting from a minimum SIP of 500.
The lock- in period is 5 years, but there are various open-ended schemes you can choose from.
So, start small. Retire big.
Retirement Mutual Fund Planning
Broadly, a retirement plan consists of two phases: Accumulation and Consumption.
When you’re working, you are capable of accumulating money for your retirement. At this stage, you can invest in various long term investment options depending on you risk profile.
Let’s say I am a retired individual. This is the time I’d need money to run my monthly expenses. During this stage, my accumulated fund has to be parked in safe options like debt mutual funds, where I can draw my monthly income from.
Why Retirement Planning With Mutual Funds?
You have multiple options for retirement planning. Here are few advantages of mutual funds over pension plans.
1. Mutual Funds are More Flexible Investment Products:
Unlike pension plans it does not have any restrictions on the regular premium payment, or making complete or partial withdrawals in between.
You can discontinue your investments or make partial withdrawals, with no penalties.
2. Mutual Funds are Tax Efficient Instruments:
Long-term capital gains booked under equity mutual funds are completely tax-free. In case of debt mutual funds, it is 10% before indexation and 20% after indexation.
Many times it is seen that after adjusting for indexation, the capital gain tax in case of debt funds also come out to be nearly zero. To understand indexation better, click here.
Thus Systematic Withdrawal Plan (SWP) proves to be a tax-efficient option as compared to pension which is added to your income and thus is taxable. To understand more about SWP, click here.
3. Mutual Funds are More Transparent and Investor Friendly:
Mutual Funds have a wide variety of schemes. The information regarding the fund manager, investment objective, strategies, past returns, risks associated etc. are publicly available.
On the other hand, pension products are not so transparent.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.