How to plan retirement through Mutual Funds

Retirement Planning is a vast topic. We will discuss some broad guidelines. There are 10 high level steps for retirement planning

1. You need to estimate your monthly income need during your retirement. To estimate the monthly income need, you need to determine your monthly expenses at your current lifestyle or projected lifestyle. Then you need to apply inflation over the time period till your retirement.

2. You need to determine one time expenses like expensive vacations, investment made on home improvements, children marriage etc. These expenses should also adjusted for inflation.

3. You need to determine how much estate or inheritance you plan to leave behind for your family.

4. You need to determine how you will meet your monthly income needs. Will you meet it through the income generated from your retirement corpus or withdrawals from your corpus or a combination of both.

5. You need to estimate how much return your retirement corpus will generate post your retirement.

6. You then need to determine your asset allocation based on your age, asset liability situation and risk appetite.

7. You need to estimate return on investment, based on which you can determine how much you need to save and invest on a monthly basis.

8. The next step is to determine the set of investments that will enable you to meet your investment objectives ans start investing in a disciplined manner.

9. retirement Planning is not a static process. you will have to update your retirement plan from time to time if there's a change your expense pattern, family situation etc.

10. Finally, you need to rebalance your retirement portfolio from time to time to ensure you are aligned to your investment objectives.

As far as pension plans are concerned, there are broadly three categories of product available in the market offered by life insurance companies, mutual funds and schemes under the National Pension Scheme (NPS). The life insurance pension plans can be traditional or unit linked. These products offer life cover in the event of an unfortunate death and also provide investment options to build your retirement corpus. The unit linked plans also offer a variety of asset allocation options depending on your requirements. However, suffices to say here that it is not wise to mix life insurance and investment because it usually leads to sub optimal results towards both of those objectives.

unfortunately, there are not many pure retirement / pension products offered by mutual funds. Currently retirement plans are being offered by Franklin Templeton, Tata Mutual Fund, UTI Mutual Fund and Reliance Mutual Fund. These plan offer some option with respect to asset allocation requirements. While performance of some funds have been disappointing, the performance of others have been good. These funds have a lock in period and there are charges for withdrawals before retirement. The charges for premature withdrawals acts as a disincentive against drawing from your retirement corpus, because withdrawals from your corpus before retirement may put your retirement planning at risk.

The other option is to create your own retirement portfolio comprising of equity, debt and hybrid funds depending on your asset allocation needs and investing in them systematically through systematic investment plan. You will have the flexibility to choose funds base on your own requirements versus the limited options that pension plans provide. However, this also calls for more disciplined investing.

You should consult with your financial advisor to determine which is the best option for you.