Wednesday, December 24, 2008

Where to Invest for Retirement Planning?

What is the best retirement plan where we can invest? Alas, this simple question does not have a one line answer!

Moreover, if we really want to plan for our retirement >20 years from now, it's a good idea to spend an hour or so rather than come to a hasty decision. In fact when you are planning for retirement, you are also, in a single stroke, managing your personal finance. Because retirement investments takes into account your financial goals, income, spending and savings. So it is a good idea to spend some quality time on this.

So, let's start with figuring out your retirement funds, how much every month will you need after factoring inflation and how long will the funds keep going.
(you may like to spend time with this retirement planner, these sheets and calculators)

After you have an idea about your retirement needs, you also figure out how much to invest. And depending on what your income is, you make the decision for savings too. So, in a way, your retirement planning is a complete management of your money too!

Now it's time to weigh the various options available. The common investments options are:
  1. Pension products from Insurance companies,
  2. Mutual Funds and
  3. Post Office investments.
  4. PPF.
Before we proceed, it's important to consider three out of four parameters of investing. i.e. 1) Growth, 2) Security and 3) Expenses (leaving out liquidity, which has to come much later!)

The pension products from the Insurance companies have a high cost structure as they pay a decent amount to their Agents. The Insurance companies have to follow guidelines from IRDA to invest your money which is generally in safe investments (Other than ULIPS where investor bear the investment risk). This affects the returns and the average return can be pegged at around 6% as of now.

ULIP Pension products can give higher returns though the investor bears that risk. But the cost structure of ULIP pension funds is higher than Mutual Funds.

Mutual Funds offer better returns and again they are subject to market risks. But over a long time frame, the returns are really good.

Post Office monthly accounts offer interest @ 8% per annum, payable monthly.

Now, coming back to the question about the best retirement plan, the answer would be a combination of the following products:

Mutual Funds, Public Provident Fund, fixed deposit (FD) and fixed maturity plan (FMP), etc to build the retirement fund while you are young and can take risks.

As the fund grows, the investments can be deployed in avenues like FDs, senior citizens scheme, Post Office Monthly Income Scheme, MF investments with a systematic withdrawal option, FMPs in the dividend distribution mode and monthly income plans, etc to get periodic returns.

Essentially it's like bat like Sehwag first and then let Sachin take you to the winning post!


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