Hi, Iam 42 yr Female with a fixed salary of 2.5L per month additionally I make around 2L per month. I have a home loan of 2cr and 10L of fixed deposit. Iam planning to retire in next 10 yrs with 1.5 lacs monthly retirement income. What should be my SIP investment. Also I am on new tax regime, I pay almost 80k per month only taxes. How can I reduce this amount. Please advice.
Ans: At 42, with a fixed salary of Rs 2.5 lakh and an additional Rs 2 lakh monthly, you’re in a strong financial position. Your goal is to retire in 10 years with a monthly income of Rs 1.5 lakh. However, you also have a home loan of Rs 2 crore and face a high tax burden of Rs 80,000 per month under the new tax regime. Let’s address both your retirement planning and tax-saving strategies in detail.
Assessing Your Retirement Goal
Target Retirement Income of Rs 1.5 Lakh: To generate Rs 1.5 lakh per month after retirement, you will need a substantial retirement corpus. Based on current inflation and life expectancy trends, the corpus needed will be around Rs 4-5 crore to sustain a comfortable retirement for 25-30 years.
Time Horizon of 10 Years: With 10 years to go, your focus should be on high-growth investments like equity mutual funds to ensure your retirement corpus grows enough to meet your future expenses.
Monthly SIP Investment: To achieve Rs 4-5 crore in 10 years, you will need to invest a significant portion of your income through systematic investment plans (SIPs) in equity mutual funds. Based on your target and expected returns, a SIP of Rs 1.25-1.5 lakh per month would be ideal. Equity mutual funds with a 12% annual return on average can help achieve this goal.
Importance of Equity Mutual Funds
High Growth Potential: Equity mutual funds tend to deliver 10-12% returns over the long term. This is essential for building a corpus that beats inflation and grows enough to meet your retirement needs.
Actively Managed Funds: Actively managed mutual funds allow professional fund managers to make dynamic investment decisions. These funds often outperform index funds during market fluctuations, providing better returns. Actively managed funds are preferable in your case, as you aim to maximize returns over 10 years.
Avoiding Index Funds: Index funds only mirror the market performance and cannot provide better returns during downturns. They also lack the flexibility of actively managed funds. Since you’re in a time-sensitive situation with a 10-year goal, index funds may not offer the growth required for your retirement plan.
Structuring Your SIP Portfolio
Diversification is Key: You should focus on a diversified portfolio with large-cap, mid-cap, and flexi-cap funds. This ensures a balance of risk and return.
Higher Allocation to Equity: Given your long-term horizon, allocate around 70-80% of your portfolio to equity funds. The remaining portion can be invested in debt mutual funds for stability.
Avoid Direct Funds: Investing through a Certified Financial Planner ensures that you receive professional guidance and regular portfolio reviews. Direct mutual funds may seem cost-effective, but they lack advisory services, which could affect your long-term growth potential. Regular plans managed by a CFP offer a holistic approach and help you make informed decisions.
Reducing Your Tax Burden
Under the new tax regime, tax-saving opportunities are limited. However, there are strategies to manage and reduce your tax outflow.
Interest on Home Loan: You can claim a deduction of up to Rs 2 lakh annually on interest paid on your home loan. Ensure you are availing this benefit as it directly reduces your taxable income.
National Pension Scheme (NPS): Contributions to NPS allow you to claim an additional deduction of Rs 50,000 under Section 80CCD(1B). This reduces your taxable income while helping you build a retirement corpus.
Avoid Fixed Deposits for Tax Efficiency: Your Rs 10 lakh fixed deposit offers very low post-tax returns. Interest from FDs is fully taxable under your income slab. Moving this amount into debt mutual funds will provide better returns and reduce tax liabilities as debt mutual funds are more tax-efficient.
Tax-Efficient Debt Mutual Funds: Debt mutual funds offer better tax treatment than fixed deposits. Long-term capital gains from debt funds (held for more than three years) are taxed at 20% with indexation, which lowers the tax impact. This can be a better option for preserving capital with lower tax outflow.
Loan Repayment Strategy
Prioritize Home Loan Repayment: Your home loan of Rs 2 crore is a significant liability. While you are earning well, it’s important to prioritize repaying the loan faster to reduce your interest burden.
Avoid Over-Investing While Carrying Loan: While you need to build your retirement corpus, ensure that you are not overly focused on investments while ignoring loan repayment. A balanced approach is recommended. Use any surplus income to make part pre-payments on your home loan.
Emergency Fund and Insurance
Build an Emergency Fund: Set aside at least six months' worth of expenses in a liquid fund. This ensures you have immediate access to cash in case of any emergency, without having to dip into your investments.
Adequate Health and Life Insurance: Ensure that you have sufficient health insurance coverage for you and your family. Consider upgrading your health policy to cover increasing medical costs post-retirement. You should also have term life insurance to protect your dependents from financial stress.
Final Insights
Significant Monthly Investment Required: To retire comfortably in 10 years with Rs 1.5 lakh monthly income, you’ll need to invest Rs 1.25-1.5 lakh per month in equity mutual funds. This will help you accumulate the Rs 4-5 crore required to sustain your retirement lifestyle.
Tax Efficiency is Crucial: Shifting away from fixed deposits and leveraging home loan deductions and NPS will reduce your tax burden. Focus on tax-efficient investments like debt mutual funds to manage your tax outflow better.
Balanced Approach for Loan Repayment and Investments: Maintain a balance between paying off your home loan and investing for retirement. Early loan repayment will reduce your financial burden in the long run.
Long-Term Equity Exposure: Given your 10-year horizon, staying invested in equity mutual funds is crucial for achieving your retirement goals. Avoid direct funds and index funds, and instead, opt for actively managed funds through a Certified Financial Planner for better returns and regular guidance.
Regular Portfolio Reviews: A Certified Financial Planner will help you monitor and adjust your portfolio as needed. Regular reviews ensure your investments remain aligned with your long-term goals.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
Question by Santosh on Dec 01, 2023Hindi
