There are just so many answers around us on how to plan for retirement and the irony being that most answers are all quite right. And then when one tries to actually get down to planning nothing seems to be a workable solution for most families in question. Why is this so? Often this is because of non-financial reasons. Those reasons are driven by emotions and not financial wisdom. It is important to understand some ingredients of a good retirement planning strategy.
A good strategy
Things mandatory to have:
a) Income or inflow/s must rise each year at least in line with inflation.
b) Income must survive you i.e money should not run out before you die.
Good to have but not mandatory:
a) Corpus must be flexible,liquid and accessible
b) Income/ inflows must be tax optimised i.e planned so that taxes are minimal or nil
c) Capital is protected or re-created by a certain age
d) Some estate is available for distribution to family
Here are 12 methods broadly encompassing retirement planning methodologies used by various individuals.
Irrespective of which method you consider using,please remember,everything depends on circumstances,financial situation and priorities in life.
* 1.The FD method: This is a case when you have ample money. This method works if your withdrawal need is at about 3 to 4 per cent of your corpus. Say you need R 25,000 per month i.e. R 3 lakh p.a to live comfortably and if you have about R 1 crore you are fine. R 3 lakh is 3 per cent of R 1 crore,so in future years,as your need rises with inflation you will still be alright as you can currently lock deposit rates in the range of 810 per cent for the next 5-10 years.
* 2. The Bond method: Quite similar to the FD method stated above,just that investments are made in bonds.
* 3. The Bond method via Mutual Funds: Quite similar to the FD method stated above except that there is far more tax efficiency using fixed maturity plans (FMPs) and debt mutual funds if your withdrawal need is much higher and such that it lands you in highest tax slab.
* 4. The Superannuation method: Simplest and easiest to execute. You will get about a third of this corpus as tax free commutation and the remaining will buy an annuity for you. You have no option or way of modifying this method. This would work if your superannuation corpus is really huge.
* 5. The Pension Policy method: Works almost like superannuation with the difference that you are contributing in a policy but the same logic of superannuation fund will apply. Again for this to work,you need to have a really large corpus. The caveat here is that the withdrawal need explained in method 1 needs to be about 1 to 2 per cent. This is because the annuity rate,say 1020 years ahead will be about 4 to 5 per cent p.a. To make this method work assume that virtually all your monthly savings will need to be contributed into a pension policy. This is possibly the worse way to plan retirement in my view.
* 6. The Property & Rent method: Quite a favourite amongst all Indians. Everyone wants to be able to live off a rent. Nothing wrong with this method except that rentals get revised every 23 years for commercial and say yearly for residential properties. Such revision can be upward or downward. There is a risk of property being vacant. It is also fully taxed and you may find yourself in service tax net as well.
* 7. The Multiple Property method: People like to buy many properties during their working life. During retirement,properties are sold one by one and retirement is managed there from. There may be some issues related to liquidity and capital gains but a method that works quite well.
* 8. The Property & Reverse Mortgage method: Well if a person does not have any savings per se then as an option of last resort this could be a very effective method for funding retirement. Issues are that you will get level payment with revision every 3 or 5 years just the fundamental pre-condition being that property has clear title and is worth quite a bit of value.
* 9. The Direct Equity method: Investments are made into a stock portfolio directly. This method is quite efficient when it comes to tackling inflation but quite painful to execute. How to decide how many shares of various companies to sell each month to arrive at the monthly cashflow? But then you can pull out exactly what you want each month. This is the best way to minimise taxes. Negatives are risk of volatility and the need of constant involvement from your end to monitor and make this method operational.
* 10. The Equity & Bond method via Mutual Funds: A far better and efficient method than method 9. Very tax friendly and extremely easy to operate. A combination of equity and bond funds with STPs and SWPs programmed therein,everything can work like magic. Though risk of volatility is a big negative,nonetheless this is a great method for those who need much more from their corpus and for people who have not been able to create large retirement corpus.
* 11. The Alternate Investment method: Many people believe in buying gold,paintings,land,venture funds,precious stones and metals etc and believe that they can fund their retirement by selling such assets one by one over time. Needless to say one needs to be quite savvy to make such purchase decisions in the first place and issues of tax,capital gains etc will crowd the mind-space all the time.
* 12. The Eternal Hope & Luck method: It is funny but a large majority actually subscribes to this method. Most would not admit to this but somewhere people tend to think,Things will work out; somehow,No need to worry,God is watching. He has given us life; He will take care of us. In essence a large majority operates on this most dangerous method of retirement planning.
Whichever method you choose,make sure all the related paperwork and operational technology platforms are in good order. As you grow older,fixing this becomes that much more difficult. You might even have difficulty in making a signature.
Author is Director,Transcend Consulting