Expert View. Plan your retirement with MFs

Given the plethora of financial products available today, it can be daunting for the retail investor to plan for his/her retirement. It is therefore, imperative that one be clear about how to go about achieving retirement goals in an efficient and simple manner.

Firstly, we should understand that retirement planning consists of two phases: accumulation and distribution. The first phase should start when one starts earning and has investible surplus and ends when one retires (or when one stops earning). This accumulated corpus can then be used to earn payouts on a regular basis (usually monthly) as one stops earning.

Needless to say the first primary principle in creating a substantial corpus is to save as much as possible and as frequently and regularly as possible. This is notwithstanding the fact that during one’s working years, one also has to fulfil other goals, such as significant spends on marriage, children’s education, buying a house, looking after dependent parents, vacations and so on. Calculating an indicative requirement for one’s post retirement cash flow with expected time left for retirement would give an idea of the amount that is required to be put aside on a monthly basis. One also needs to buffer for an eventuality that one’s investments don’t yield the kind of returns that was expected.

Once the need for building such a corpus is understood and accepted and one starts saving, the next important part is determining the asset allocation. Depending on one’s risk appetite, one could allocate suitable proportions to debt or equity. Generally speaking, as one grows older the appetite for taking higher risk may reduce as focus increasingly turns to preservation of corpus. Through all this, an important consideration that should be uppermost is the need to beat inflation. For, if that is not achieved, one’s corpus may not be enough to give a reasonable inflation-adjusted cash flow post retirement.

Now we come to the third most important factor in the accumulation phase: what type of products to use for savings and investments? While it can be easy to be swayed by products that come with fancy names such as “guaranteed income”, “assured pension”, “retire rich”, etc, don’t go by names but by the product features and expense ratios. Product features are available on mutual fund websites and in monthly factsheets. Product labels such as Riskometers and recently released SEBI guidelines on product standardisation would make it easier for investors to understand the various mutual fund schemes. Easy availability of data (portfolio, scheme features, expense ratios) makes it simpler for investors to consider mutual fund schemes in the accumulation phase.

While annuities are one option, there are alternative options that can meet the need of customers for regular cash-flows in this phase offered by mutual funds. Investors can also consider monthly dividend payout schemes of mutual funds or even unique features such as Systematic Withdrawal Plan (SWP) or Regular Withdrawal Plan (RWP) to meet their monthly cash-flow requirements post retirement. An SWP or RWP allows an investor to withdraw a designated sum of money and units from the fund account at pre-defined regular intervals in two ways — fixed withdrawal or appreciation withdrawal. This can be used as a source of regular income.

Retirement planning is a reality one can’t take one’s eyes away from, and the sooner one starts, the better.

The writer is Head – Fixed Income, Principal Mutual Fund

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