Here are some tips to help you plan your cash flows after retirement to ensure you maintain the lifestyle you desire
After retirement, your monthly pay cheques stop coming in. Advancements in medical science have increased the average human life expectancy. Maintaining healthy finances can enable you pursue your passions and unfulfilled desires in those sunset years. With increasing cost of living and skyrocketing medical expenses, planning for your retirement becomes important if you don't want to be dependent on others.
A retirement plan determines if you have enough funds to support the lifestyle you seek. Your inflows and liabilities, coupled with inflationary pressures, determine if you are ready to retire. A well-designed retirement plan provides you with an inflation-factored steady income though you do not go out to work. Start planning for retirement early to benefit from the power of compounding.
Public Provident Fund
Risk-averse investors can save in Public Provident Fund (PPF) that offers an attractive eight percent returns. It is possible to open a PPF account in any nationalised bank or select post offices. The minimum amount to be deposited in this account is Rs 500 per year. There is a cap of Rs 70,000 that can be deposited in an account every year.
The entire balance can be withdrawn on maturity after 15 years. If you desire, there is an option for extension for a period of five years.
Employee Provident Fund
As mandated by labour laws, about 12 percent of your monthly basic salary is invested in Employee Provident Fund (EPF) for the salaried. The employer also contributes an equal amount to the fund. You can augment this and top-up additional money into your EPF account. This is called Voluntary Provident Fund.
Currently, the returns on EPF are 8.5 percent and are tax-free in case you have been in continuous employment for five years. An annual deduction of up to Rs 1 lakh is allowed under Section 80C.
The amount augmented in the PF account is paid at the time of retirement. In the event of resignation, the balance in the current EPF account can be transferred to the new employer account. The accumulated balance is paid to the legal heir, in case of unfortunate death of the employee.
National Pension Scheme
An enticing retirement option, the National Pension Scheme (NPS) can boast of better returns than the traditional PPF/PF owing to its equity investment component. Managed by fund managers, NPS is similar to investing in mutual funds. The money you set aside for your retirement in NPS is invested in capital markets. Your returns will depend on market performance at that point in time.
NPS comes in three flavours. Fund E scheme exposes a portion of not more than 50 percent of your invested money to equity. Fund C locks all your money into fixed income instruments like corporate bonds and government securities. Fund G invests your money in government securities, a scheme targeted at the riskaverse.
Fund management charge in NPS is low in comparison to mutual funds. You are obligated to invest a minimum of Rs 500 every month. Investing in NPS between Rs 1,000 to Rs12,000 per annum between April 1, 2010 and March 31, 2011, will attract a contribution of Rs 3,000 from the government.
If the revised Direct Tax Code (DTC) is implemented without any changes, it will keep the NPS out of the tax net, making it an attractive investment opportunity.
Pension plans
Pension plans or retirement plans are offered by insurance companies to help you build a retirement corpus. On maturity, this corpus is invested for generating pension or annuity.
Pension plans come in various flavors. In case of 'immediate annuity plan', the annuity commences within one year of paying the one-time premium. In 'deferred annuity plan', the annuity is deferred to a time determined by the policyholder, say 25 years.
Pension plans 'with cover' offer an assured life cover in case of an eventuality. Pension plans 'without cover' pay out the corpus built to date after deductions like operational expenses and unpaid premiums. In 'joint life annuity', in case of unfortunate death of the insured, his spouse receives the pension.
Pension plans are good instruments for retirement planning. But the only factor to keep in mind is inflation could make its returns humbler. Apart from this, some factors make pension plans appear unattractive. Once the annuity clock starts ticking, you cannot access these funds. Further, annuities from these plans are taxable as income.
Some points to ponder
You may not incur expenses for children's education or marriage after retirement
In all probability, your housing and vehicle debts would be cleared
Plan for unforeseen medical expenses.
When money is locked for a very long period in fixed instruments, it could lead to reinvestment risk
Exposure to equity is the key to wealth creation. You cannot sustain the same lifestyle with interest from pure debt products like bonds for long. In periods of high inflation, investors actually lose money from their investments in bank fixed deposits and the like
PF has an edge over PPF. In case of Provident Fund, the employer also contributes to it. Further, the returns from PF are marginally higher than those from PPF
Ensure a company has AAA rating before investing in its bonds
Associated costs of an instrument bites into the overall returns. Further, tax on the returns reduces the amount that finally reaches your hands
Investing in a second property early provides you with regular rental income
Risk appetite a determining factor
Your choice of investment vehicles for retirement depends on risk appetite, tenure and returns expected from your retirement corpus. Young individuals can afford higher quantum of risk and invest in equity. For those closer to their retirement years, conservative instruments aimed at capital preservation, with a small exposure to equity, is recommended.
The avenues are many including PF, PPF, superannuation plans, fixed deposits, bonds, mutual funds, equity and real estate. People, who start retirement planning early, enjoy golden retirement years.
