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Monday, September 17, 2012

Five tips to secure your retirement corpus

Most people fail to save adequately for retirement since the goal seems to be in the distant future. However, if you want to build a sizeable retirement corpus, you must start early and review your portfolio regularly. ET lists some ways to financially secure your sunset years.

Fix corpus, choose investment avenue

As with any goal, the first step is to calculate the amount you want in the given time. This will depend on your current lifestyle and the number of years for which you want an income after retirement. Since building a retirement corpus is a long-term goal, your investments will vary accordingly, and the earlier you start, the better it is. So, at 35 years, if your monthly expense is Rs 50,000 and you want to maintain this level for 15 years after retirement, you will have to invest Rs 29,112 a month (at an annualised return of 10% and inflation rate of 6%).

However, a 45-year-old will have to invest Rs 93,196, while a 25-year-old will have to invest only Rs 10,174 a month. If you start saving early, ensure that at least 75% of the monthly investment is in equity. For the debt portion, you can depend on your monthly contribution to EPF and investment in the PPF. If three-fourths of a portfolio in equity is too risky for you, invest about 30% of your surplus in debt mutual funds. Review the portfolio regularly to ensure your investment is on track.

Repay debt before you retire

When you retire, chances are that you will have no regular income. In such a scenario, it is important that you are not stuck with any loan repayments as these will deplete your savings fast. So, if you've taken a home loan, make sure that you repay the entire amount before you hang up your boots, even if it means paying a higher EMI to reduce the tenure. In the case of insurance, there will be few policies that will be mandatory even after retirement, such as car insurance, but for other insurance like a health plan, ensure that you buy these early, because the older you are, the higher the premium that you will be required to pay.

Tweak your portfolio

Investing in equity is important for creating a retirement corpus as it gives good returns. However, as you shift closer to sunset years, reduce the equity portion and increase debt in your portfolio. This is essential because preservation of your corpus becomes more important than its appreciation. So, if you start investing at 35 years, 75% of your portfolio could be in equity, but at least five years before you retire, equity should not comprise over 40% of the portfolio. You can either use systematic withdrawal plans to shift the money from equity to debt instruments, or move a sizeable part of corpus to bank deposits. However, just because you are retiring does not mean that you have to give up on equity entirely; invest 15-20% of your portfolio in equity funds.
 Build a contingency fund

A medical emergency can cripple the best of finances, and for retirees, it could be disastrous. Besides, there are very few health insurance options for retirees, and the ones that are available, are expensive or offer small covers. In fact, most health insurance plans end at the time of retirement. It is worse for people who depend on the health plans provided by their employers during their working lives. It's best to buy a health plan early, but apart from this, you must also keep a contingency fund, usually 5% of the total corpus built, for medical emergencies. This should be put in a liquid fund so that it is available readily.

Bank on reverse mortgage

The best laid plans can go awry. Whether it's a child's higher education or a medical exigency, you may suddenly find yourself short of the planned retirement corpus. If you find yourself in such a situation, and own a house, the safest way to get a regular stream of income is to reverse mortgage it. Under this scheme, home owners above 60 years of age can convert a part of their self-owned home into income without having to sell it.

The bank calculates the value of the house and fixes a percentage of its current value as loan amount. This is based on parameters, such as the likely lifespan of the senior citizen and his spouse. Typically, the loan amount is 60-70% of the market value of the property, which will earn you a good income. After you and your spouse die, the house is sold by the bank to recover the loan amount, and the balance is given to your heirs. Alternatively, your heirs could buy the house from the bank. 
Source : The Economic Times,  Sept 17, 2012

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