Skip to main content

Invest in equities to save for your retirement

Invest in equities to save for your retirement





Adequate savings and investments that beat inflation are a must to build a big enough corpus for a comfortable retirement. Investment in equities is essential

 

A cousin of mine will retire in the next three years. He lives in his own house and his children are married and well-settled. He will receive about `30 lakh as settlement amount. His simple question was: Is this money enough? In retirement planning, this is the critical problem to solve. Retirement planners call this problem the adequacy of corpus.

To my cousin, `30 lakh seemed like a lot of money, until I pointed out that, going by his current earnings, it was just five years' pay. My cousin is addressing the retirement problem too late. Even if he finds that he has not saved enough, there isn't much he can do at this stage. He quickly pointed out that he would spend much lesser. Retirement is associated with frugal living and careful spending since investors reconcile to managing within the wealth they have accumulated. He told me that he will learn to `manage' but needs ways to invest it `safely'. Outliving the wealth is a fear most retired investors face, which is also the reason why they like to protect what they have.

Adequacy of corpus can make all the difference to post-retirement welfare and choices. Retirees are vulnerable. Retired investors fall prey to financial scams when they discover that their corpus is unable to fight the growing expenses. They make risky choices with their money, much like the daily wage earners who buy lottery tickets out of sheer desperation to get rich.

How do we ensure that we have enough before we retire? There are several calculators that can help with the math. Is there a common sense approach to solving this problem? Since inflation is the villain in this piece, let us build our case around it.

First, consider the income during the earning years. If it is has grown at a rate that beats inflation rates, it is a positive factor. Technically, there is an opportunity to build wealth only when incomes match or exceed inflation.

Second, consider the amount of income set aside as savings. Inflation hurts the money needed for expenses every year. Savings should persist and increase even after inflation. This needs both adequate income and controlled expenses.

Third, savings have to be invested at a rate that exceeds inflation. Since only a portion of the income is saved, it needs to work hard to become a large number that will provide for future expenses.

To secure retirement, all these three factors should move favourably over all the earning years: income should grow at a rate higher than inflation so that expenses can be met; savings should be positive and grow even if inflation increases the expenses; and investment return should exceed inflation rates so that savings grow in value over time. Consider a case where out of every `100 earned, `20 is saved. Assume that the inflation rate, the income growth rate and the investment return are all identical. This investor will not have an adequate retirement corpus. Why? It takes four years of savings to make up for one year's expense. And savings are not growing enough to beat inflation. Unless the years in retirement are fewer compared to the earning years, this money will not be adequate. Adequacy of corpus needs savings that cover the income in shorter number of years, and investments that grow at higher rates over a long period of time. What are the steps to take? First, ensure that the growth rate of income always exceeds the rate of inflation. Families with more earning members, professionals that up-skill themselves to earn more, and those who work towards enhancing their earnings are in a better place when it comes to retirement. Second, make it a habit to save since your life actually depends on it. As incomes move up, saving rates should also move up. Essentials needed for the household form lower and lower proportion of income, as income increases. Higher savings rates ensure a higher corpus. Third, take charge of the assets that have been built with your savings to make sure that they grow at a higher rate.

Many investors are careful with their income and their savings, including my cousin. However, the risk he runs is in the manner in which his wealth is being held. The `30 lakh he will get only represents the money he accumulated in his provident fund after allowing for withdrawals to buy a house and to conduct his daughter's wedding. He has a three-bedroom house in which he lives, worth about `1 crore in today's value. His investments in bank deposits, PPF, mutual funds and savings certificates amount to `20 lakh. Has he secured his retirement? Maybe not.

He may have assets, but they are not available for his retirement. As long as he lives in that house, he will not earn any rental income. He plans to leave the house behind for his son. It looks like my cousin has spent his earning years accumulating assets for his son, even if he fails to see it as such. It is tough getting him to see the house as the white elephant.

Retirement cannot be secured if investments are made in assets that cannot be actually used. Households that do not have financial assets expose themselves to this risk. However much may be the appreciation in value, real estate and gold represent assets that are not easily sold off. Rental yields can be too low, maintenance costs can be high, and unless properties enjoy prime location, they may not earn a steady income to help in retirement.

Many see equity as a risky asset. But they fail to see the risk of lower corpus, if they do not invest in equity during the earning years. A diversified equity portfolio including an equity index can catapult the retirement corpus to a much larger size. Long-term goals such as retirement are ideally funded by equity, whose short-term volatility can be borne for the long-term benefit. If an 8% return leads to the doubling of value in nine years, a 12% return can do that in six years. Over a 36-year savings period of accumulation, it can make all the difference.

Secured retirement is about saving and investing sensibly. As long as each earning year is evaluated for adequacy of income, savings and investments, retirement is most likely to be secure.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
      2. Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now