Things to note…
* As I said earlier, if withdrawing from mutual funds to save income tax, withdraw after one year from corporate stocks and equity mutual funds, aggressive debt funds. Same, in case of debt funds, withdraw money from pooled funds after three years.
* In case of equity based investment, long term capital gain on withdrawal after one year is free of income tax up to Rs 1 lakh subject to conditions in the financial year. 10% tax on the profit above that is enough.
* In the case of debt funds, withdrawals after three years are taxed at 20% after adjusting for inflation on long-term capital gains.
* This income tax is payable only when the total income exceeds Rs.3 lakh for senior citizens in a financial year.
* If a person’s pre-retirement expenditure is Rs.50,000, his expenditure on retirement will be 80% of Rs.50,000 i.e. Rs.40,000 in the next month. But this amount will increase in the coming years as the prices rise.
Therefore, the retirement savings fund will last only if the carrying amount is less than the income. Additional expenses can be withdrawn in subsequent years.
For example, if a mutual fund is earning 8%, the expense ratio should be 6% or 4%.
* Even after retirement, 6 times of monthly expenses should be maintained in risk-free investment separately for emergency expenses. If it is 10 – 12 times better,
* As the premium for a life insurance policy increases every year, it is necessary to add more of the lump sum accordingly.
* You can use pooled funds for long-term by dividing them into short-term needs and long-term needs and investing into low-risk investments and slightly high-risk investments.
* Retirement at the age of 45 – 50 will require money for very long years i.e. about 40 years post retirement. Accordingly, it is better to add more lump sum funds or to have some means of income even after retirement.
* If the compound fund earns 7% per annum and withdraws 4% per annum, the compound fund will return for 30 years. Calculate this and create a lump sum fund in advance.
* 25 times the amount required for annual expenditure as well as approximate pooled funds. For example, if one’s monthly expenditure is Rs 50,000, the annual expenditure is Rs 6 lakh. 25 times of this should be a pooled fund of Rs.1.5 crore.
* Invest in SIP mode to add to retirement savings. A few years before retirement, it should be switched to hybrid funds for safety reasons.
After retirement, it should be transferred to debt funds and spent in SWP mode. It will be a one-size-fits-all approach. We think adding Rs.1 crore for retirement is enough. But after 20 years, Rs.1 crore will not be enough for us. It seems to be possible to keep a few more crores. So, first decide how much you need for retirement!
(Planning to be continued)