Retirement Strategies: Using Mutual Funds

Shweta Nichani July 24, 2019 0 Comments

Retirement is considered the ‘golden’ period of one’s life, and it could be – if you plan right for it. You’d need a sizeable corpus to retire comfortably, while maintaining the same lifestyle, or a better one. The first step is to plan, the second is to execute that plan.

We’d covered the golden rules of retirement in one of our earlier articles. We’ll now cover how to use mutual funds to plan for your retirement and what strategies to adopt.

As discussed in our earlier article, you’ll first need to estimate how much you will need when you retire. This will involve understanding your current expenses and savings, the age you expect to retire, your expected lifespan, inflation and the growth you expect from your investments. You’ll arrive at a required corpus for your retirement. A good retirement calculator can help you figure out how what your corpus will be after adjusting for inflation and how much you need to invest to build that corpus.

Let’s look at an example:

Current age 30 years
Retirement age 60 years
Expected lifespan 80 years
Amount you want to have for retirement 1 crore
Expected rate of inflation per annum 7%
Amount needed at retirement adjusted for inflation ~7.7 crores
Expected rate of return on your investment 12%*
SIP (monthly) ~25,000

*assumed rate of return for equity mutual funds

The above calculations don’t consider any existing savings you may have but taking them into account will give you a better picture of how much you’ll need to invest. Also, do account for any other planned expenditures and emergencies while figuring out how much you would need when you retire. You can calculate your retirement needs here.

Once you figure out how much you need to invest, the next step is to set up your SIP.

Start a SIP

What investment strategy should you follow?

Your investment strategy depends on two factors – your age, and your ability to take risk, both interlinked. You’ll also have two needs – capital appreciation, and regular income.

You can start a SIP in equity funds for capital appreciation. The further away you are from retirement, your ability to invest in equity is higher. Periodically step-up your SIP to possibly reach your goal faster. You can also add lumpsum investments along the way to your corpus.

The closer you get to retirement, use Systematic Transfer Plans (STPs) to move into debt funds, and Systematic Withdrawal Plans (SWPs) for monthly withdrawals.

STPs can be used for moving investments from debt to equity and from equity to debt. In the case of retirement, or any goal, the closer you get to your goal, the lesser you’ll want your investments to be impacted by market volatility. Using an STP will move your money from equity to debt and give your portfolio the stability you need.

SWPs allow you to withdraw a fixed sum at regular intervals from your fund. This will give you a regular stream of income during retirement.

It would be prudent to transfer a lumpsum from your equity fund to debt using an STP, and to do an SWP from the debt fund to your bank account. Ensure you continue to have investments in equity, albeit a lower allocation, so there’s still room for capital appreciation, and you benefit from the best of both.

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