These days when we retire, we get a large corpus of our own hard earned money accumulated through different govt schemes like Provident Fund, Group Insurance, Gratuity, Leave Encashment and Commutation. Mind you, it's all your hard earned money which is returned to you by the govt. There is no gift from the govt. So, it's more of a reason to invest this money in a prudent and judicious manner, so that it can provide financial support to all your future needs.
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| Retirement Planning |
Some of us will like to put this money into savings and enhance our depleted monthly earnings, through interest earned on the savings, since pension is half the pay and commutation makes it further half. So, practically you are getting one fourth of your last pay, if you don't take any reemployment. Is it prudent??? Is it enough and will it last long??? Savings can never compensate your depleted pension over a long term. Saving can only give you inflation adjusted returns. You may feel it is sufficient today but after 10-15 years, your monthly expenditure requirements will be much more than today, due to inflation eroding your wealth. The inflation adjusted returns will never be able to compensate you. Inflation is a monster which will eat away all your savings. Your cost of living will go up every year due to inflation. Hence, savings are not enough to financially survive in long term. You need to diversify into other options of INVESTMENT. There is a difference between savings and investment.
Difference between Savings and Investment
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called investment. Money loses value over time, and prices of goods and services go up. That’s why your money also needs to grow—and preferably at a pace faster than inflation—to be able to afford at least the same things that you could buy once upon a time. That’s where an investment helps. Putting money away in a savings bank account, FDs, RDs can be classified under ‘savings’ but not ‘investment’. This is because in these financial instruments, your money lies idle. Too much savings and too little investment doesn’t create wealth. Even a liquid fund (a category of debt mutual fund) is just a parking vehicle; a savings vehicle. This is not investment. You need a basket of equity and debt funds, as per your risk appetite, as investments for wealth creation. It’s always wise to save money for small term goals, emergencies and casual expenses as it provides quick access. This makes it easier to meet small goals. But in the long run, consider your changing needs, limited income sources and inflation; savings may fall short for bigger financial goals. Remember you are planning for future. Savings are for the present and investments are for the future.
While you must secure your needs for the next few years with safer assets, you should be taking on more inflation-beating assets if your savings are to last 20-25 years. The problem emerges in later years of life when the value of money erodes due the monster called inflation and that makes the pace of withdrawal fast. Not having some equity exposure at this stage is more destructive to your portfolio. Without it, you will struggle to maintain the quality of lifestyle in future that you desire.
There is no point putting your entire corpus into schemes which will fetch you only 5-6% post tax returns. Our efforts should be to earn minimum 8-9% post tax returns. If you have not taken re-employment and availed commutation, you may come under 5% tax bracket (Rs 2.50-5.00 lakhs) with Rs 1.5 lakhs savings and newly introduced Rs 40,000/- of standard deduction. So, if you have no other disclosed income, you may still earn 7.5-8% post tax returns in schemes like SCSS, POMIS etc. In that case, you may go ahead with these schemes. But if you are reemployed, you will again be in 30% tax bracket. Therefore, we all need to diversify into investments, where post tax returns are healthy. Whenever you have to earn more than govt schemes, there will always be some risk involved in short term. But today there is risk in every sphere of life. You can't avoid an option because there is little risk involved. Before going any further, let me give you some sanguine advice to allay all your fears:-
1. Never put all your eggs in one basket.
2. Don't be fearful of equities and mutual funds.
3. To earn little more, you need to take little more risk.
4. Don't put your hard earned savings blindly into any scheme.
5. Mutual funds are not only equities (risky assest) but there are comparatively safer debt mutual funds available.
6. Equity is not gambling at all.
7. The knowledge required to invest in equity market is nearly zero: Warren Buffet.
8. It is nearly impossible to loose money in equity market in long term ( minimum 10-15 years) : Warren Buffet.
I am 100% convinced of all the facts given above. You see, index (sensex) was 100 in 1979 and crossed 35,000 recently. That means it has given nearly 350 times returns in almost 40 years. During these 40 years, it has seen all earth shaking upheavals like 1992 indian economic crisis, Harshad Mehta scam, Dot Com Bubble, Ketan Parikh Scam, the great American Sub Prime Loan crisis and all kinds of coalition governments in India. There were many more disasters in between which I have not mentioned. But index has survived and still marching ahead with full force. Please don't miss this opportunity due to unnecessary fear and invest some portion of your corpus into equities. When I say equities, I only mean EQUITY MUTUAL FUNDS. ALSO, NO LUMPSUM INVESTMENT IN EQUITY MUTUAL FUNDS. IT IS ALWAYS SIP OR STP. Please don't take exposure to direct stocks unless you have the sound financial knowledge about buying and selling stocks. This will be highly detrimental to your financial health and you will never be able to collect courage to enter equity market in future, due to your misadventures in the past.
INVESTMENT OPTIONS
OK, now come to the brass tacks of different options of comparatively safe investments. The best bet is to start investing in the name of the son/daughter above 18 years/old age, parents or in-laws. Gifting money to them and then investing it, is a perfectly legal strategy. “You can gift any amount to them without any tax liability". You can gift any amount legally to your lineal descendants/ascendants or your spouse's lineal descendants/ascendants ie parents, grand parents and great grand parents, your brothers and sisters and your spouse's brothers and sisters, even brother and sisters of your parents. Please remember, there is no point gifting money to your minor children or wife because, though the amount gifted to them does not attract any income tax, but any income generated by them, due to the gift, will get clubbed to your income.
So, please gift some portion of your corpus money to your parents, in-laws, major son/ daughter, if they are not income tax assesses. Your parents or in-laws can invest in following schemes without paying any TDS and income tax and you will get full 8-9% post tax returns (since they will not be income tax assesses) on your investments, which is pretty good and highly secured:-
1. Senior Citizen Saving Scheme(SCSS) - 8.3% per annum (15 lakhs each)
2. PM Vaya Vandana Yojana (PMVVY) - 8.3% if you choose yearly interest payment (15 lakhs each).
3. Post Office Monthly Income Scheme (POMIS) - 7.6% per annum (4.5 lakhs each).
4. Public Provident Fund (PPF) -7.6% per annum ( Rs 1.50 lakhs per year per individual). All members of the family can invest in respective PPF accounts. A family of four can invest Rs 6 lakhs per annum. There is a lock in period of 06-07 years in PPF.
5. Debt Mutual Funds - Around 7-8% returns per annum. Invest around 50 lakhs( 4-5 different short term/ ultrashort term/ liquid funds). Presently, long term debt funds may be avoided due to current economic scenario of tight liquidity. Even Debt Mutual Funds can be purchased through your relatives who are not in income tax bracket, to save tax.
6. Equity Mutual Funds - 12 % per annum( very conservative returns) for a longer duration of 8-10 years. Invest systematically either through SIP (Systematic Investment Plan) or STP (Systematic Transfer Plan) from debt mutual fund. NO LUMPSUM AMOUNT IN EQUITY MUTUAL FUND. Around 20,000/- 30,000/- per month in 3-4 good quality equity mutual fund schemes can be invested.
The key to Investment is to ensure tax free returns. This can only be achieved through your parents/in-laws who are senior citizens and eligible to invest in SCSS, PMVVY and POMIS. Your major sons/daughters can invest in PPF/Debt Mutual Funds/Equity Mutual Funds. They will not be in income tax bracket or may be just under 5% tax bracket. So, their tax liability is almost nil. Equity Mutual Funds in long term (8-10 years) are almost safe. Equity exposure, as per the risk profile of individuals is a must. How much to invest totally depends on your risk profile and present and future needs. But remember, when you start investing, please keep investing for another 10-12 years to reap the rewards of long term wealth accumulation. So, you should only invest that portion of your corpus which is not required by you in near future. I am again reiterating, not for the sake for repetition but for my conviction, that not having some equity exposure at this stage is more destructive to your portfolio and long term wealth creation. Without it, you will struggle to maintain the quality of lifestyle in future that you desire. Whatever I have stated above, I have followed for parking my corpus. But that doesn't necessarily means that it will be ideal for you also. If you can select two senior citizens from your family or from your spouse's family, you can easily invest around Rs 70 lakhs in safe financial instruments with out any risk. You can invest Rs 15 lakhs each in SCSS (15+15=30), PMVVY (15+15=30) and 4.5 lakhs in POMIS (4.5+4.5=09). Around 30 lakhs you can gift to your children above 18 years. Rest you can utilize for your own consumption.
Remember, it's your money and finally, you will be responsible for all your losses and gains. If you feel, you can't handle it alone, please take help from your internet savvy children, friends, well wishers or any good financial advisor. But if you go to anyone with the knowledge of above explained facts, you will better off. No financial advisor can cheat you if you have little bit of financial knowledge.
All debt mutual funds are not very safe in short term. Long term debt mutual funds, Gilt funds and dynamic bond funds may please be avoided at this stage as they are highly volatile.
I hope this article will help you save and invest your hard earned corpus of retirement benefits in a wise and judicious manner to fulfill your future dreams and needs.
DISCLAIMER : The above information is available on public domain and has been taken mostly from websites and YouTube videos freely available on internet. The opinion expressed above is in no way recommendation of buying or selling. You must consult your financial advisor before making any fresh investment in equity market.
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