How to plan your retirement through Mutual Funds?

Everyone looks forward to retirement years after having shouldered all the earthly responsibilities. People often refer retirement years as golden years because they don’t have to worry about going to office, meeting deadlines, preparing presentations. Rather, they can enjoy at home by pursuing their hobbies. They have all the time for leisure activities which they could not do while working in office. But the question here is – Is enjoyment in golden years possible without enough money corpus?

The answer is ‘NO’. Retirement years cannot be golden years if you do not have enough capital to take care of your financial needs. Therefore, retirement planning is crucial for financial independence in your golden years. Central Government employees do not have to worry much about retirement planning as government has taken care of their financial needs in the form of pension which provides steady source of income after retirement. It is very important for private sector employees to have strong retirement corpus at their disposal and they must do it because Government does not provide financial safety net to them unlike other western countries.

What is the importance of retirement planning?

There are certain factors like inflation, rising medical costs, falling interest rates on fixed deposits and falling rental yields that make saving for golden years a lot more important. Retirement planning often gets ignored because either people did not get to save much or sometimes people do not get desired investing vehicle to plan their retirement. When people reach their retirement age then they realize that they have not saved enough and may not be financially independent in golden years. The importance of retirement planning can be understood by the below mentioned points:

(1) Rising Inflation

Inflation eats up much of your income as purchasing power gets curtailed with every increase in the price of basket of commodities. When prices increase then the same goods become costly if your income doesn’t grow by same amount. Therefore it is of utmost important to save money for retirement years and in fact it should be invested where you get higher returns after adjusting for inflation. Mutual fund is one of the greatest tools to plan for retirement years where you will not have to worry about inflation since your returns will be higher even after adjusting for inflation.

(2) Rising medical costs

Ever rising medical costs can become a real pain if you don’t have a proper provision for your old age-related ailments. People often approach private health sector for treatment because of advanced technology and more attention paid by the doctors at the time of check-ups and associated costs are high as inflation in private health care sector is around 15%. If caught up by a serious disease, then a bigger chunk of your savings can go into treatment. Therefore, if you have retirement corpus by your side then you may be in a good financial position even after paying medical bills.

(3) Falling interest rates

Majority of Senior citizens in India still rely on fixed deposits and government small saving schemes for their steady income source. They are unaware about the fact that there are mutual funds which can provide them more returns than FDs and are safe too. Historically speaking, interest rates on government schemes have not been of much respite in the last twenty years. Hence, people should consider mutual funds to generate enough funds for their worry-free golden years.

(4) No pension

Since private sector in India does not come under the financial safe net of government, private sector employees do not get pension. They are supposed to make their post retirement funds by their own without the help of the Government. However, they do not have to worry as there are so many reliable fund managers in mutual funds domain who can take care of their retirements with just a simple monthly SIP. A regular systematic investment plan can fetch a huge corpus in one’s golden period

(5) Financial Independence

People work hard during their career in order to fulfill their financial requirements and shouldering earthly responsibilities. They start making provisions for their retirements because they do not want to become burden on their children and want to retain their financial independence. Everyone should consider retirement planning if they want to spend their golden years without much worry.

Why are mutual funds considered for retirement planning?

Mutual fund, being an excellent avenue for retirement planning, offers a wide variety of suitable products to cater to all kind of investors at their different stages of life. These are best for retirement planning as mutual funds have transparent modes of investment which provide higher returns. Since retirement planning is a long-term financial goal, mutual funds fit best into it as mutual funds give higher returns to investors in the longer run. The importance of mutual funds for retirement planning can be understood by the below points:

(1) Hedge against inflation

Pension fund schemes are very popular for retirement savings as they provide a cushion against inflation to investors. Most mutual fund retirement schemes are able to generate returns that beat inflation due the equity investments these schemes do. Investors are even allowed to regularly pull out a fixed amount from their retirement corpus through systematic withdrawal plan in order to meet their monthly expenses.

(2) Risk

Mutual funds offer better rewards for the risk to the investors in the longer run. Investors who want to take lesser risk, can choose hybrid funds that offer a balance of capital protection plus returns. In fact, some mutual funds even provide the option to switch from one scheme to other scheme since investors become more conservative in investment as they become old.

(3) Returns

Mutual funds have the capacity to generate higher returns for your retirement planning as they invest into multiple asset classes. They will provide multiple options as per your risks and expected returns from underlying scheme. By choosing mutual funds investors can enjoy the compounding benefits i.e. returns on accumulated returns for their retirement corpus.

(4) Taxes

Investors most of the times are not able to discern the impact of taxes on their corpus. Tax eats up a lot of earned income if invested in FDs and government small savings scheme because these are taxed as per income tax rates of investors. On the contrary, Mutual funds are considered as tax friendly investment avenue since taxes depends on the holding time period. Tax structure for mutual funds are mentioned in below points

Only NPS cannot create more corpus for retirement planning

India used to have a defined benefit Pension System, but finance ministry replaced it with New pension scheme from 1st April 2004. Under new pension scheme, government employees will have to pay 10% of their basic pay towards pension corpus and government will also make an equal payment. At the time of retirement, employees will have to mandatorily invest 40% of pension corpus to purchase annuity plan from LIC. The drawback here is that employees are not free to invest their corpus even after retirement. If same amount has been deducted towards mutual funds, then the corpus which a person gets at retirement would be huge plus there would not be any restriction on its usage. Private Sector employees are allowed to invest in NPS at their own will.

How to plan retirement with mutual funds?

The two main phases of human life are accumulation phase and distribution phase. Accumulation phase is the time where people are working and earning enough to sustain their livelihood plus saving for retirement. The distribution phase is the time where people have come to the age of retirement and they have stopped working. Therefore, they do not have steady source of income with them. People who have built a corpus during their accumulation phase can really enjoy their retirement life with no stress at all. The early the better philosophy works well with retirement planning. Let us look at how people should plan for retirement with mutual funds.

Accumulation phase

People are really caught up with so many responsibilities in their accumulation phase like education for their children, healthcare expenses, EMIs, credit card bills etc., and they hope that their expenses will be less after retirement but that is just a delusion. Expenses will be there even after retirement, but the nature of expenses will get changed. People find it hard to save for retirement as they have other financial obligations towards their family. It is true that it is hard but not impossible because you can easily achieve your retirement goals through mutual funds. SIP is a great option for doing this because you will not have to trade off any other goal with retirement goal. The best part of creating retirement corpus with mutual funds are SIPs. Systematic Investment plan is a monthly installment which get debited from your account towards a goal. These are flexible as you will not have to pay any fee or penalty for missed installment. There may be times when you do not have enough balance in your account for a particular month then you can resume it from next month onwards. SIPs can be stopped and resumed any time as per your convenience. Investors are suggested to bear in mind that in case you miss three consecutive installments then your SIP may stop and you have to apply for new registration.

Let us take an example to make you understand the power of investing through SIPs to generate a corpus of 3 crores in 30 years. Monthly SIP of ₹ 8000 is required to generate a retirement corpus of approximately ₹ 3 crore given the interest rate is 12.5%. Investing I ₹ 8,000 is not a daunting task, it is easily doable to make your retirement years stress free. If you want to make SIP for different amount for different wealth corpus then you can use our SIP calculator by going to https://www.sipfund.com/calculator.html

Besides SIP, Investors can also go for different mutual fund schemes which align best with their financial commitments. There is no single best fund that suits all investors who are planning their retirements with mutual funds since they have different financial needs and varying income levels. The important factor could be the age at which an investor starts planning his/her retirement corpus. People who start keeping aside funds for retirement in their early age are likely to earn higher retirement wealth corpus than the one who starts late. Depending on investors’ risk appetite, time horizon and income levels mutual funds offers wide products to cater to the golden year financial requirements. Equity funds may suit investors who are starting early and can include mid-cap and small-cap funds in their portfolio. Equity oriented funds are also best for investors who are planning to start some business after retirement like opening a school, starting a restaurant since these projects will require huge capital and equity funds are famous for their higher returns. Debt funds are suited for investors who are starting little and do not want to get caught up with market fluctuations. Last but not the least, Hybrid funds are more balanced and can work as a great friend for your golden years if you just started investing in mid-stage of your career.

Distribution phase

This is the phase where you have all the time in your hand to pursue your hobbies and enjoy a stress-free life. If you have accumulated enough for your retirement years, then this could be enjoyable period of yours since you are not financially dependent on anyone. Having a retirement corpus by your side can really make you confident for meeting all old age challenges

Conclusion

In today’s You Only Live Once (YOLO) generation, it becomes important to plan for retirement. People should keep in mind that retirement planning is as important as other financial decisions. People have a tendency to believe that retirement is far so they get caught up in fulfilling other responsibilities first but what they do not understand is that if they do not save now then they might end up becoming burden on their children. Fund manager should be considered by investors in order to understand the role of mutual funds in building wealth corpus. Retirement is the time where you can play with your grand-children, grow your favorite plants, and read those unfinished books or even write your own books etc. and hence this period should be free from financial worries.

Happy Golden years