The perfect retirement savings plan

Did you know that between 15 and 20 million of India's 400-million-strong workforce has a retirement savings plan?

While the average fund at the time of retirement is just Rs 52,000 per individual, people are still keen on contributing to a retirement fund, because traditional structures, such as the joint family, or children supporting parents, are changing.

Everyone wants to have a comfortable retirement, but without adequate planning it probably won't happen.

Planning your retirement

The trick is to start early so that you can retire peacefully. To do this, make a list of your financial goals and what you own, so that the gap between the two is clear and you know what it is you are aspiring for.

Assess your incomes and expenditure, and make provisions for contingencies. For example, set aside some money for travel and medical expenditure post retirement. Try to cut down on trivial expenditure -- learn to differentiate between the nice-to-have and the need-to-have.

It would be a good idea to consult a financial advisor, who can help you develop a workable plan. Your objective is to realise your future financial goals, based on your current personal financial situation.

Your financial plan needs to be monitored at regular intervals to make sure you are on target to meet your objectives.

But before you rush to sell your family jewellery and buy stocks remember that there are many plans to choose from. Investing in shares, mutual funds, or even fixed deposits and property is risky business, so it is critical that you understand and get comfortable with the risks, costs, and liquidity of your investments.

The ideal portfolio

As you plan for retirement, your portfolio should consist of a range of instruments (equities, mutual funds, bonds, debentures, property, gold) depending upon your objectives and risk profile.

Remember that the older you are when you start to save towards retirement, the harder it becomes. Also, with falling interest rates and increasing volatility in the equities and debt markets, it is important that you start planning for his retirement at an early age.

Managing your portfolio is equally important, and involves decisions regarding what assets to include, how many to purchase and when, and what assets to divest.

A hypothetical break-up

Typically, people in their late 20s and early 30s, with family obligations, should begin by looking at property. In fact, up to 50% of your fund should be invested in property, as it appreciates over the long term.

Following this should be up to 30% exposure in equities/ mutual funds, to reap the high returns they promise over the long term. 10% in long-term bonds and debentures will yield a fixed return over a period of time.

Liquidity is as important, so invest 5% in gold, fixed deposits and 5% in cash.

Types of plans

There are two types of plans available in India today: traditional plans and ULIPs.

Traditional plans cater to customers with a low risk appetite. They are a steady investment, since a major chunk of investible funds are in debt instruments, which promise almost assured returns over the long term.

They contribute to the creation of assets owing to their long tenure, and generally, withdrawals are not allowed before maturity.

Unit-linked insurance products lean towards greater risk, depending on the distribution you have chosen between equity, debt and cash allocations, but they allow the flexibility to choose the sum assured, as well as the premium amount, and the option to change the level of the premium or sum assured even after the plan has started.

With ULIPs, you can also change asset allocation by switching between funds, and enjoy the convenience of tracking your investment performance on a daily basis. ULIPs are also liquid in nature, where you not only have the option to withdraw money after a few years, but can even make partial and systematic withdrawals, should the need arise.

Private players such as ICICI Prudential, Birla Sun Life and Bajaj Capital have a number of plans that suit different needs. There are plans where, if you have a lump sum to invest, you can do so in a cost-effective single premium unit-linked pension policy, and not be hassled to pay premiums at regular intervals.

There are as many annuity options as there are plans, ranging from flexible ones, to growth targeted plans, to balanced returns.

Remember however, that it is you that must finally benefit. Select a plan that gives the maximum maturity value.

Make sure to understand all costs involved before purchasing a plan, including charges for premium allocation, fund management, surrender, mortality, and fund switching.

Other services for which you might be charged can include partial withdrawal, policy administration and revival. Though insurers may try to sell you a life cover bundled with your pension plan, stay with your pure term policy and buy a pure pension plan to maximise post-retirement benefits.

Post retirement, you can even ask your insurer to transfer all the funds to another plan that gives a higher pension, at no extra cost.