Retirement planning: Are you up for it?

When it comes to retirement planning, it is never too soon. Even if you are young, in your twenties or your thirties, the fact is that sometime or the other, your productive years are going to come to an end and the regular stream of income that you get either out of your employment or out of your business is going to decline. When such a time comes, you have to ensure that the standard of living that you and your family are used to is maintained. And if one plans well, the standard of living can even improve! In this article, we shall discuss how to go about achieving this.

There are various factors that one has to take into account while planning for retirement. The first and the foremost is the amount of money needed and when it is needed. Second, there could be a sudden liquidity requirement to fund your child’s education or marriage or even to take care of a medical emergency. Third, and most important one is that you surely don’t want taxes to gobble up a substantial part of your earnings. So towards this, lets firs begin with the obvious - pension paid by your employer. Any uncommuted pension (periodic payment) is taxable as salary even if you are no longer an employee of the organisation. The commuted value of any pension (lumpsum payment) is fully tax exempt in the hands of a government employee u/s 10(10A)(i). This is so even for a government employee absorbed by a public sector undertaking --- C K. Karunkaran v Union of India 4 Taxman 178. However, for other employees, if they also receive gratuity then one third of the commuted value is exempt and if no gratuity is received then a half the commuted value is tax-free. Where pension is receivable by the spouse upon death of the employee (family pension), though it is not a salary, a special deduction of one third of the amount or ` 15,000 whichever is less is available. What if your employer does not have a pension plan? What if you are not employed and have your own business or profession? There is no cause to despair since there are a number of investment products available which can be fashioned into regular pension schemes. Let us see what these are. The idea is to design your own pension plan during your productive years by contributing to these plans during your working life. We assume that you have taken full advantage of the deductions available under Chapter VI-A of the ITA covering Sec. 80C (ELSS is the best, though it is subject to market risks which happen to be miniscule at the present juncture) Sec. 80D, among others.

Thereafter, have a good look at the entire gamut of investment options. Choose the ones which have the best growth potentials. Invest in such schemes either in lump sum or through SIP or as and when you have investible funds. Earmark these as your retirement plans and do not withdraw therefrom, unless there is an emergency. It is an established fact all over the globe that investment in equities gives the best returns, when your goal is long-term, longer the better. This is most important. Do not be lured by the title of the investment avenue. You have the capacity of converting any plan into a Retirement Plan or a Children’s Education or Marriage Plan or any other plan with a target only provided you have a long-term view, and no matter whether the market falls or rises, do not encash until you reach your goal. Realise that this strategy does not lock-in your money and it is available in the case of real crisis situations. This is more than most important. Since you have a longterm, a really long long term view, the wisest thing is to take a substantial equity exposure, either directly or through MFs. Patience is a virtue. Nothing is more true in the world of stocks. A long-term view always pays rich returns. Have a look at the following Table to get convinced of the universal fact that the returns from the market give the best reward in the long-term; longer the better. For instance, had you purchased an average portfolio (MF) in 2002, it would have grown by 15.44% in 16 years, which incidentally happens to be the term of PPF. This income is tax-free! It must be noted that the actual returns are much higher since the BSE index, and for that matter any index related with stock markets, does not account for the dividends paid out (around 1.5%). Now how do we use the analysis of the above table for our purposes? Well - invest in any well diversified large cap fund from a pedigreed fund house. In other words, a regular mutual fund (MF) large cap scheme that does not lock-in your funds for a pre-determined time may be used to achieve the same effect. Money compounded will grow likewise regardless of the scheme that you will invest in. One may think this is too easy. And to an extent it is. The only but (and it is a big BUT) is the fact that returns from an MF not being certain or assured proves to be a hurdle. The above table seeks to neutralize this perceived risk - MFs (rightly so) aren't allowed to assure any return since the same is market dependent. But retirement planning is (by definition) a long term investment planning exercise and so far as the market is concerned, longer the term, lesser is the risk. So you see, dear reader, efficient retirement planning is entirely up to you. Question is are you up to it?