43 Years Old Earning 1 Lpa Seeking Retirement Planning Advice

I am 43 years old and working with a MNC earning 1 Lpm. I am planning for retirement fund. Please suggest me which instrument is best. And also help me compare between NPS and Pension plan of insurance company, which is better and why?

Ans: Hello;

NPS is much better than pension plans offered by insurance companies due to the following reasons;

1. Lower costs
2. Flexibility to change fund manager for different asset classes
3. Better Returns
4. Tax benefits
5. Annuity flexibility
6. Limited withdrawals allowed
7. Tier 2 investment account feature
8. NPS Vatsalya for minors

Best wishes;

Ans: Understanding Your Retirement Objective
– You are 50 years old. That means you have 8 to 10 years to retire.
– Your goal is to receive monthly income after retirement.
– This income must be safe, regular, and last your lifetime.
– You’re considering pension-like products offered by insurers.

Pension Plans From Insurers – The Core Structure
– These plans promise monthly income after you invest a lump sum or regular premium.
– Some offer fixed payouts for life, others give returns based on market performance.
– The popular types are immediate annuity and deferred annuity products.
– These are mostly offered by life insurance companies.

Key Limitations of Pension Policies
– These plans often have poor liquidity. Once you invest, money gets locked.
– The returns are often low, usually 5% to 6% annually.
– Many of these plans don’t beat inflation in the long run.
– Once pension starts, you cannot increase it. No flexibility.
– There’s limited or no capital appreciation.
– After your death, only part or none of the capital goes to your family.
– Taxation of pension income also reduces net return.

Important Red Flags to Consider
– Pension policies are structured to benefit the insurance company.
– Charges are high, and many riders are unnecessary.
– You lose control over your money after annuitisation.
– You can't change or exit easily. No adaptability to changing needs.
– There’s no step-up in pension to meet rising costs.

A Better Option: Systematic Withdrawal from Mutual Funds
– You can invest in diversified mutual funds during your earning years.
– After retirement, set up a Systematic Withdrawal Plan (SWP).
– This gives you regular monthly income and control.
– You stay invested. Your money keeps growing.
– The withdrawals can be customised anytime.
– The balance money can be passed on to your spouse or children.

Why Mutual Funds Offer Better Control
– Mutual funds offer more liquidity. You can withdraw anytime.
– Long-term returns are better. Even with taxation, it is cost-effective.
– You can plan the withdrawals to reduce tax liability.
– You choose the growth and withdrawal plan based on market and life needs.

Importance of Regular Plans Over Direct Mutual Funds
– Direct mutual funds seem cheaper. But come with many hidden risks.
– There’s no guidance, no one to monitor your portfolio.
– Most investors make emotional decisions when market falls.
– With a regular plan through a Certified Financial Planner (CFP), discipline stays.
– You get asset allocation, rebalancing, retirement tracking.
– The advice is continuous, goal-based and customised.
– Regular plans through MFD with CFP ensure peace of mind and long-term results.

Actively Managed Funds vs Index Funds
– Index funds copy the market. They offer no risk control.
– In falling markets, they fall equally. No defensive strategy.
– Actively managed funds select better stocks.
– They adjust based on market conditions.
– Fund managers use research and analysis to control risk.
– Over time, actively managed funds deliver better value for retirement planning.

Your Retirement Planning Framework
– You need to build a retirement corpus now.
– Target to accumulate 20 to 25 times your expected annual expense.
– Use a mix of equity, balanced advantage, and hybrid funds.
– Keep increasing SIPs every year by 10%.
– Use NPS up to Rs 50,000 for tax savings and future income.

Asset Allocation Post Retirement
– After retirement, don’t stop investing.
– Shift to lower-risk funds and use SWP.
– Keep 2 to 3 years of expenses in liquid funds or FDs.
– Use balanced advantage funds for regular income.
– Partial equity allocation helps beat inflation.

Other Complementary Income Options
– You may consider Senior Citizen Savings options after age 60.
– These give fixed returns with quarterly interest.
– Useful for a portion of your corpus.
– Also keep one emergency fund equal to 6 months’ expense.
– Ensure health insurance and term cover are in place.

Don’t Fall for Insurance-Cum-Investment Policies
– If you already hold endowment, ULIPs, or money-back plans, assess them carefully.
– Most of them underperform and don’t suit retirement needs.
– Surrender them if they are poor performing and reinvest in mutual funds.
– Rebalancing that money can support your retirement better.

Practical Steps to Start Today
– Review your current savings and expense structure.
– Calculate your post-retirement monthly need today.
– Inflate it at 6% for 10 years.
– Start SIPs in equity-oriented mutual funds through a CFP.
– Begin investing in NPS if you haven’t.
– Avoid locking your capital in annuity or pension schemes.

Why Avoid Axis or Similar Pension Policies
– These products give low post-tax return.
– No scope to change payout later.
– Limited death benefits to nominee.
– Not ideal for those who prefer flexibility.
– Better to keep control over your retirement funds.

Checklist for Strong Retirement Plan
– Increase savings each year as income grows.
– Build a corpus of 20 to 25 times your expense.
– Keep 30% in equity even after retirement.
– Ensure you diversify across asset classes.
– Keep your tax liability low by proper withdrawal planning.
– Keep family informed about where money is parked.

Additional Tax Planning Insights
– Use HUF or spouse’s account for withdrawals to reduce tax.
– Plan redemptions smartly to use LTCG exemption limit.
– Use multiple folios or plans to split redemptions.
– After age 60, use Senior Citizen slab advantage.

Finally
– Retirement planning should not depend on pension policies from insurers.
– They are rigid, low-return, and offer poor benefits.
– Your focus should be on flexible, tax-efficient, and growth-oriented investments.
– Mutual funds with SWP give income, growth, and peace of mind.
– Actively managed funds through a CFP add value and guidance.
– Don’t delay. Start planning now to retire peacefully and confidently.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment