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Mutual Funds - Mutual Funds.
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Posted by on June 16, 2008, 9:29 am
Retiring? Some quick money tips
The best way to create a good corpus for retirement is by investing at
an early age. However, once you actually retire, it becomes even more
important to choose the right instruments to park the accumulated
funds.
Quick Tips
If you have partly invested in equities, start a systematic withdrawal
plan to meet monthly expenses
If you have a very high exposure in equities, consider index-linked
capital protection products
Buy real estate for regular rental income
This is very important because the returns from the corpus would
finally decide the kind of lifestyle you can afford.
The most crucial aspects of post-retirement investing depend on the
following:
Size of the accumulated nest egg
Desired standard of living and expenses
Life expectancy
Desire to leave some inheritance for your loved ones
Real rate of inflation
Returns from your investments and their tax implications
Risk-return profile.
Retirement is generally associated with safety. However, given the
present levels of high inflation, investing in most fixed income
instruments would give you a negative real rate of return. Further,
rising inflation might upset retirement calculations quite badly.
For instance, a post office scheme that offers 8 per cent a year would
give a negative pre-tax return, since current inflation stands at 8.75
per cent. And after taxation, the real rate of returns would be even
lower.
Now, if you wish to use the interest income to fund your retirement
expenses, the chances are very high that you will end up dipping into
the corpus invested in the post office saving scheme. And that is real
bad news because it means that your money is actually depreciating and
that too at a rather alarming rate.
In such a scenario, creating a judicious asset allocation mix that
includes fixed income instruments for safety and regular cash flows
and high return investments like equities and real estate will help
matters to a great extent.
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Of course, the last two might see some volatility in the short run,
but they are expected to deliver superior returns over fixed income
investments over the long run.
Another factor to consider is that they should be tax-efficient as
possible. Equities, equity funds and debt funds are good ideas because
they are either tax-free or concessional tax rates apply to them, as
opposed to traditional investments like bank deposits, senior
citizen's deposits and post office schemes.
If you have made a part of your pre-retirement investments in equities
or equity funds through the systematic investing route, given the
current tax structure, you would not have to pay any taxes on their
redemption.
However, instead of redeeming all your money from equities and moving
immediately to fixed income instruments on retirement, you could start
a systematic withdrawal plan that would help meet monthly expenses
while the equity portion keeps earning good returns.
In case you have a very high exposure to equities, which is not
advisable post-retirement, consider equity or index-linked capital
protection structured products. They generally provide you with the
safety of capital through deep discounted bonds maturing at a value
equal to or greater than capital invested. Invest the balance in
options that provide high equity-linked returns.
Real estate is another avenue one could look at. Ideally, one could
purchase property that would generate rental incomes. Also, the
property value would appreciate in the long term and be a natural
hedge against inflation.
Another important issue to consider is getting adequate insurance.
While life insurance is not required for a retired person, since the
basic premise of life insurance is protection of loss of income, buy
medical insurance for yourself and spouse. Look for covers that
offers guaranteed renewability at not a very high cost.
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