TIP, MIP, SIP your way to a safe and secure retired life
Staying invested in equities for a long period will help generate a large corpus for your retirement.
A healthy and safe life is what people want throughout their working life and when one retires, one wants to have enough wealth to enjoy financial independence. A good retirement plan takes care of the golden years in every situation. Retirement planning requires long term dedicated savings. Here is how one should go about retirement planning:
Wealth: One should start systematic investment plan (SIP)
Ensuring financial discipline and investing regularly through mutual fund SIPs will help you accumulate a good amount of wealth for your retirement. This not only will help you tackle market uncertainty, it will average your investment cost during the market rise and falls.
Manish Kothari Head of Mutual Funds, Paisabazaar.com says as equities can be very volatile in the short term, SIPs in equity mutual funds is the most convenient option for retail investors to create their retirement corpus. “By staying invested in equities over a significant period of time, the returns should easily beat inflation by a wide margin and help you accumulate a corpus to live your retirement life in peace,” he said.
However, as one nears retirement, one should gradually shift from equity mutual funds to debt funds through systematic transfer plan (STP) route. Just like one should always avoid market-timing for entering into equity markets, the same is applicable for the exit too. Kothari also said that the STP process should start as one nears his retirement age, say 2–3 years from the retirement age.
Safety: One should have a term insurance plan (TIP)
Even though investing regularly in a SIP you would have a sizable corpus on retirement to fall back on. However, a SIP alone may not be sufficient in the case of a contingency.
Ankur Agarwal, Category Head, Life Insurance, BankBazaar.com said that for instance, today’s average earning person depends on some form of financial assistance to buy a house or a car for regular needs. In case the investor meets with an accident that affects her ability to work and earn, it would affect her ability to pay the loan on her existing assets. Most of his investments until date would go into clearing off liabilities rather than be kept aside for future use. This is where a Term Insurance Plan can help.
“A term insurance helps you avail a high sum assured at a low premium. The plan pays a lump sum benefit in case of a person’s premature death or disability. Thus, it ensures the family is taken care of financially even in one’s absence,” he said
Considering the financial security the term insurance provides, it can be bought at any age and should be your first life insurance plan. However, the younger you are when you get it, the better it is. For example, A Rs 1 crore term plan that provides you cover until you are 55 would cost you Rs 6,000 per annum at the age 25 but would cost you around Rs 8,000 per annum at 35. Therefore, before planning for retirement, one must take a term plan today by spending a little and secure their long term liabilities including investments made towards retirement planning.
Income: One should start monthly income plan (MIP)
One should review his financial plan at the time retirement and find out his assets allocation based on his financial goal and time horizon and accordingly invest in MIPs. After accumulating funds through SIP, one can start investing in MIP for getting second income by taking dividend option.
MIPs are debt mutual fund schemes which invest a small part of the funds that are around 15-25% in equities for capital appreciation and from the remaining, it offers a regular income to the investor (monthly, quarterly or half-yearly) through dividend payouts. The returns in MIPs are not guaranteed, it may fluctuate from 8-10%. The purpose of a small part of equity is to get inflation adjusted return.
However, it is also important to invest some amount in schemes which can give your guaranteed returns like Fixed Deposit or Senior Citizen Saving Scheme (SCSS) to get sustainable second income every month. Not only this, one should also opt for System Withdrawal Plan. “After retirement, the investor should opt for SWP option in his debt funds to take care of his daily expenditures. This option works opposite to SIPs as a pre-determined amount will be deducted from mutual funds on pre-set dates and credited to the bank account. This will generate a steady cash flow for meeting daily needs while the rest of the amount in the corpus will continue to earn higher returns than bank deposits or other fixed income alternatives,” added Kothari.To have financial freedom after retirement, one should plan their investments well to get a good monthly income.