Retirement planning is essential if you wish to have a fulfilling life after your work life ends. With a holistic approach to retirement planning, therefore, you would be able to create a vision of your life in your 50s and onwards, and make choices such as where to live, how to spend time in retirement and when to completely quit working.
That said, the emphasis you put on retirement planning is likely to vary throughout different stages of your life. Early in your professional career, you may set aside some money here and there for your retirement. During the middle stages of your career, however, you may want to include employing specific asset or income targets and work towards achieving them.
You may also look for retirement plans offered by reputable insurers. Today insurers like Max Life Insurance offer many benefits with such plans to help streamline your savings and maximize them in due time. Finally, once you reach the retirement age, you may move on from accumulating assets to the distribution phase, wherein you are no longer paying in, but only availing the benefits of your decades of saving.
Here’s how you can build a retirement corpus that is free from all liabilities, including taxation:
Monthly Income Plan
What is It?
There are two types of Monthly Income Plans or MIPs, offered separately by mutual fund houses and life insurers. While MIPs in the form of mutual funds are a unique class of hybrid funds that invest your money primarily in equities [in varying proportions], those offered by life insurers are savings plan that provides life coverage up to 25 years and pay guaranteed monthly income after the premium payment term completes.
Monthly Income Plans from life insurers are essentially annuities that allow you to select a one-time lump sum amount [also known as purchase price], choose an appropriate annuity option and payout mode [usually monthly, but you can also go for a quarterly, half-yearly or annual payout from the plan].
With time, these annuity payouts will start accordingly, while their amount would be based on the applicable Annuity Rate. Further, monthly income plans also provide you with life cover, offering financial security to your dear ones even in your absence.
Type of Investment
When we talk about mutual fund MIPs that invest in debt investments, these hybrid funds create income from the interest accrual route, which is then reinvested to make the fund’s Assets Under Management [AUM] grow or distributed as a dividend.
In the case of equity investments; however, mutual fund MIPs mainly generate returns through capital appreciation via trading shares on the stock market. Also, a secondary source of gains is accrued through periodic dividends or bonuses received against the shares held by the mutual fund.
On the other hand, insurance MIPs are essentially savings schemes that guarantee a monthly income for up to 10 years after the premium payment terms complete. Also, these plans also offer accrued bonuses and terminal bonuses [upon maturity] along with comprehensive life cover benefit throughout the policy period.
Taxation
Mutual fund MIPs are taxable as a debt-oriented fund. Therefore, tax regulations related to Long-Term Capital Gains [LTCG] and Short-Term Capital Gains [STCG] taxation are applicable, based on the type of plan.
However, you are entitled to receive indexation benefit, while the dividends are also tax-exempt [under specific conditions].
Life Insurance MIPs, on the contrary, offer tax deductions on both premiums paid and death/maturity proceeds [as per applicable laws].
Target Investor Segment
Overall, a monthly income plan helps create multiple sources of income, which feature a relatively lower level of risk than pure equity investments. Hence, mutual fund MIPs are usually preferred by conservative investors, who are seeking more significant returns than fixed deposits but with a minimum additional level of risk.
That said, individuals who want to secure their retirement with an additional income source that offers life cover too can go for Life Insurance MIPs.
Money Back Plans
What is It?
When you invest in a money back plan, you are eligible to receive a percentage of Sum Assured at periodic intervals, rather than getting the lump sum amount paid at the end of the policy term. In other words, money back plans are endowment plans that come with the benefit of liquidity.
Taxation
That said, given the fact that the returns on your Money Back Plans have a life insurance component [same as the Monthly Income Plans] the survival benefits of these plans are entirely tax-deductible.
Target Investor Segment
Therefore, these plans are suitable for risk-averse investors, who prefer saving through an insurance plan and also maintaining liquidity throughout. Further, in case of an eventuality, your nominee receives the entire sum assured.
Public Provident Fund [PPF]
What is It?
Public Provident Fund or PPF was introduced in India, with the primary objective to encourage small savings in the form of investments. Thus, PPF is also known as savings-cum-tax savings investment instruments that help you create a retirement corpus while availing tax savings annually.
Taxation
The principal amount that you invest under PPF is eligible for deduction under Section 80C. Further, the interest accrued is tax exempt under Section 10 [10D]. When we talk about the investment aspect of PPF, this scheme offers a suitable alternative for allocating the debt share of your investment portfolio.
Target Investor Segment
Essentially, PPF is a 15-year scheme that can be extended indefinitely in periods of 5 years. Therefore, if you are a risk-averse investor, looking for long term capital appreciation, you can open a PPF savings account in a designated bank branch or a post office. Further, investing into a PPF account also has provisions to apply for loans and make partial withdrawals against the scheme.
Mutual Funds
What is It?
In the simplest terms, mutual funds offer access to professionally managed portfolios comprising bonds, equities, and other securities to small or individual investors. Each shareholder, therefore, can participate proportionally in the profits or losses of the fund. Mutual funds are managed by the Securities and Exchange Board of India and are categorized under four broad categories:
- Equity Mutual Funds
- Debt Mutual Funds
- Hybrid Mutual Funds
- Solution-oriented Mutual Funds
Types of Investments
Overall, mutual funds invest in an array of securities, and their performance is tracked as the change in the fund’s total market cap, which in turn, is derived by combining the performance of the underlying investments.
Taxation
In the 2018 budget, however, the government has re-introduced tax on long term capital gains or LTCG tax on equity returns. Therefore, all accrued income over Rs 1 Lakh in a given financial year would be taxed under LTCG at a flat rate of 10 per cent. Further, there wouldn’t be any indexation benefit.
Target Investor Segment
Overall, mutual funds are suitable for regular investors who are new into the market-based investments. Investors can select a mutual fund scheme, as per their financial goal and set aside a portion of their savings to achieve the goal. The amount invested into a mutual fund would help add sizeable returns over a long-term investment tenure.
Make Your Retirement Tax-free and Tension-free
Each one of us has a unique view of how we wish to spend our retirement years. While some of us may want to purchase a retirement house in a far-away countryside, others might want to fulfill their dream of travelling the world. Therefore, the cost associated with the retirement will automatically be different for every individual.
Based on your retirement plans and life expectancy, hence, you must start investing in an appropriate investment avenue from an early age. To make sure that you have the best mutual fund for monthly income in your retirement portfolio, you need to devote much time in comparing different plans on their merits and shortcomings before investing in one.
Remember, planning for your retirement is an ongoing, lifelong process that would eventually take years of commitment before you can receive the final pay-off. However, once achieved, your commitment to investments will help ensure that you have an adequate amount of income every month to take care of your lifestyle expenses.