By CFP Poonam Rungta
You want to plan your retirement, but when it comes to investing in a pension plan, you get uncomfortable about locking your money for fixed return? It isn’t easy to convince people to invest in building a retirement corpus so that you create a regular source of income that can replace your salary. The investor takes a back foot when a pension plan is advised to them wherein pension will be paid for life at the fixed interest (ROI) but the capital will be locked for life and will be paid only to the nominee. This ROI will be fixed even if the bank interests go down.
Liquidity means availability of your funds as and when required, gives financial security to an investor. PENSION funds take away that liquidity, so thought of not having the capital to his/her disposition in case of emergency stops the investors from parking their money in the pension fund.
Now the question is whether you should lock the money in a pension fund or not?
My answer to this is – a big ‘YES’- you must park some portion of your retirement corpus, at least 40-50% of it in locked funds to generate a fixed ROI. To support my answer, I have the following reasons:
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An emergency may come – But prepare a contingency fund and buy proper medical coverage to handle it. Using retirement corpus for an emergency will dent your retirement income. Because if an emergency is taken care with your retirement corpus, then a more significant and recurring crisis will start, i.e., source of your monthly expense for your retired life will dwindle. How do you expect to survive then?
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If funds are blocked, then you will be saved from becoming a target of mis-spelling. On the name of retirement planning, lots of products are being mis-sold with false promises so beware.
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Demographic of Indian society is changing. Single child policy, migration of children to foreign countries for higher studies or employment, inflation etc. makes it difficult for children to give financial support to their retired parents. Children may or may not take care of their parents. You can’t keep sitting on this thought that your kid will take care of you and not do any planning of your own.
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There is a block in the investor’s mind about blocking capital. This block owes to their upbringing. They never saw their parents buying pension plans? But that’s because there were big families with 4-5 earning children who could manage to take care of their parents. It is not the case in the present times.
What you need to do for giving yourself a comfortable retired life-
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The first rule of financial planning is that you must sort out your finances for your retired life. Amidst zillion goals like buying a house, children education, taking care of health emergencies, you must not forget about your retirement. Treat retirement as one of the essential goals for which you need a plan. What would be the stream of your income when the salary stops?
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Invite a second child in your life! Start an investment regime wherein you put some money away thru SIP, as if you are spending on a second child, who will, when mature, will take care of your retirement needs. Nurture this fund in the same way, as you nurture your child. This child- SIP- will take care of your retirement.
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Have you heard of any parent, asking their child to give them back the money spent on him/her if their child does not grow up to be what they wanted to? In the same way, if your fund does not perform as per your expectation, do not think it’s a wrong decision. It will take care of some oo the other expense in your retirement period.
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Another important reason to block your retirement corpus is the interest rates. A pension plan guarantees to pay a fixed interest(ROI) throughout your life. Such a fixed income is significant when bank interest rates are continuously falling.
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Suppose your contingency plan is in place with help of medical insurance, critical illness cover, personal accident cover, credit card usage, no burden of debt. In that case, you must plan your retirement corpus in funds with capital safety and fixed ROI pension plans. You should block 50% of funds in a fixed income plan and rest should be parked with equity exposure in balanced mutual funds to meet the growing inflation needs.
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Don’t tread on this path all by yourself but get an expert opinion. Get professional advice from a financial planner for a stress-free retirement income.
The retirement life should be about carefree times with family and friends, leisure holidays, taking up hobbies, and not worried about meeting all your expenses. To achieve this, plan now so that you don’t worry later.
