Retirement Planning

How to Use Mutual Funds for Retirement Planning

All our lives we work very hard towards a better future and a better life. It is mandatory to accumulate savings in order to deal with unforeseen events or emergencies. Another event that we tend to plan for is Retirement Planning. The one thing you would like after decades of hard work is peace and comfort in your days after retirement. What if you could ensure that you live a good life in exchange of a few investments? It’s a fair deal, you should consider it.

Mutual Funds can be used for several objectives including Retirement Planning. One of the biggest dilemmas for those approaching retirement is balancing the life the way they want to live today with the life they want to live after retirement. In all likelihood, you have just a vague plan or idea about what you want, not a concrete one. For instance, it is a popular belief that whatever people save in their working life, will be sufficient for their retirement as well. But the problem arises when people do not consider the antagonist of their story that goes by the name of Inflation. Inflation, that chews into the purchasing power of your money every year, leaving you with a weaker financial support than what you predicted. For a person saving for retirement, generating returns that can possibly beat inflation seems far-fetched. It really isn’t. Provided they invest in Mutual Funds. Mutual Funds are tax efficient and flexible investment instruments which can be used for effective retirement planning. This can all be done with fewer headaches (and financial pain) than you might think. All it takes is a little homework, an attainable savings, an investment plan and a long-term commitment.

Know yourself

Before investing in any schemes, you need to ask yourself certain questions. How many years are left to your retirement? How much money will you need at retirement? What is your risk-taking ability? To sustain your current lifestyle, what is the monthly income you will need? If you have the answers to these questions, retirement planning will be easy. You must realise one thing, irrespective of your needs and requirements, there are mutual fund schemes for every individual. You can invest in equity fund for capital appreciation, debt funds for regular income, or gold for securing your future. There is no magical figure that one can arrive at for future needs. But the general understanding is that you will need at least 80% of your current income in your golden days.

Three Stages of Retirement Planning

Retirement Planning has three steps- accumulation, preservation and distribution. In the accumulation phase, you will invest in schemes in accordance with your time horizon and risk appetite for retirement. Preservation and Distribution stages run parallel to each other and you arrive at these stages only after retirement. The first goal of these two stages is to preserve the wealth you amassed in the accumulation stage and second goal is that of getting income out of that amassed amount for retirement expenses.

At the Accumulation stage you can invest in normal schemes after determining your requirements and risk appetite etc. As retirement savings are generally long-term in nature, you can have a diversified portfolio that may include equity, debt and gold. If you are someone who has a flair for real estate, you can invest in real estate portfolios as well. At the preservation and distribution stages you need to be cautious and disciplined in your approach since you will reach these stages only after retirement. As along with preservation, you need to generate regular income, you may opt for Systematic withdrawal option or Dividend payout option. In systematic withdrawal option, you as an investor can give instructions to MF houses to start paying you a fixed amount after selling out the units available.

Retirement Planning is an ongoing, lifelong process that takes decades of commitment in order to receive the final pay-off. You need to revisit your retirement plans every 3 to 5 years or as your life changes with a marriage or children, so adjustments can be made accordingly. By making these timely adjustments, you will stay on track for a better life after retirement.

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