Goodbye tension, hello pension - I am retired!

Kinnari Raval

"As one makes his bed, so shall one lie" is the best saying which can describe one's retired life. Retirement is the time of rest  for body and peace for mind and soul. However before expected time of retirement approaches, we all must prepare well in advance to enjoy it. What say?

So how can you plan for your comfortable retirement without compromising your present? Here are some suggestions.

Almost all of us  will have to fend for our retirement. But not many of us would be  seriously contemplating creating a  corpus at our current stage of life. The main reason being we want to fulfill our responsibilities, live our lives and will see whenever retirement happens.

Do you know that we  need to take out just one day for ourselves to understand our priorities,  goals and needs of our life? This would be the first step towards making your retirement plan. After prioritizing our needs and goals, the second step would be to decide the time frame (time period require to achieve our goals and needs) and the corpus i.e. the amount required for achieving the same.
Most of us may have taken  the first  two steps but may have failed to take the third step or may have fumbled along the way. 

This step is to think and plan towards  building the corpus and identifying  the best investment instruments.  Normally, Pension Plans by name itself appeal to us and it is now a common belief that it is the only instrument available or specially designed for the retirement purpose. Do you know the reason?  It is because these plans are presented before us in such a manner by our consultants / insurance agents that we are drawn towards them. But have you ever tried to evaluate what kind of returns you will actually get?

Let me tell you, not all Pension Plans are going to give good returns owing to high allocation and administration charges in the initial years and also because Insurance companies need to follow certain regulations.Hence, like all that glitters is not gold, not all  pension plans with word pension in it are good pension plans.

So what factors should you consider while working towards retirement plan? 

Your  own risk taking capacity, source of income and time frame are most important factors. By doing this exercise,  you will get the clear picture on how you  take your first step.

This article will discuss various  instruments which can help you in building  the required corpus:

Systematic Investment Plan (SIP): 

Investment in mutual fund through SIP will help you  diversify the portfolio  well.  Like aggressive investors can build their corpus via investing into equity diversified mutual funds. Alternately  they can have a blend of balanced mutual funds and equity diversified mutual funds. Selection of mutual funds needs to be done with proper research, which includes analyzing past returns with its respective benchmark returns.

National Pension System:

Tier-I account - Pension Account: One can contribute his / her savings for retirement into this non-with drawable account.

Tier-II account - Savings Account: This is a voluntary savings facility. One is free to withdraw his/her savings from this account whenever he desires, thus giving the advantage of liquidity.

Both the aforesaid accounts, viz., Tier I (Pension Account )and Tier II (Savings Account ) are pure retirement savings products with distinction being that, Tier- I is a non-withdrawable account while Tier-II is a withdrawable account to meet financial contingencies, if any.

Both these accounts offer two approaches to  investment:
• Active choice - Individual Funds
• Auto choice - Lifecycle Fund
Active Choice further has following three asset class/sections:
• Asset Class E - Investments in predominantly Equity market instruments.
• Asset Class C- Investments in fixed income instruments other than Government Securities.
• Asset Class G - Investments in Government Securities.

Auto Choice:

In this option, the investments will be made in a life-cycle fund. Here, the fraction of funds invested across three asset classes will be determined by a pre-defined portfolio based on the age of the investor.

Public Provident Fund (PPF):

Public Provident Fund is a 15 years scheme. However, after the completion of the 15 years, one can keep on extending it for a period of 5 years at a time. This way, the same PPF account offers additional liquidity to what is offered during the initial term.

In fact, this is where the magic of PPF begins. One need not start a fresh PPF account and continue it for all of 15 years, just extend the old one for five years at a time, indefinitely. This way, the same PPF account will offer additional liquidity to what is offered during the initial term.

Further, one can note that the PPF account can be continued (after the term of 15 years):
• With further Subscription or
• Without further subscription.

Recently, the government has raised the annual investment ceiling in PPF savings to Rs 1 lakh from the present limit of Rs 70,000. Besides, interest rate on PPF increased to 8.6 per cent from 8 per cent.

Above were few different ways to create funds towards retirement corpus. Many more methods are available to build a well-diversified portfolio after taking into account - inflation and tenure for the retirement age and the person's risk taking ability.

It is never advisable to put all eggs into one basket. So a portfolio diversified into different asset classes is more efficient and a rational way of doing investment.
Lastly, would like to say that we just need to open our eyes and look at other methods of achieving our desired things rather than blindly following what our agents / consultants state.

Further it is always advisable to carry out a periodic review of your portfolio and take proper guidance before investing through a Certified Financial Planner who is affiliated with an established organization.

After formulating and implementing your retirement plan, I am sure that on the day of your retirement, you will proudly say that I'm retired - goodbye tension, hello pension!

• ApnaPaisa is India's leading price comparison site for financial products such as loans , credit cards and insurance plans . Author can be contacted at: www.facebook.com/Apnapaisa .