Retirement planning should stand out as the most important financial goal in an investor’s financial planning exercise. Where to invest for retirement planning is an often asked question.
The answer is pretty simple if you understand goal based investing. Hop over to it now if you haven’t read through it. Once back, it should be very clear to all of us that retirement is a long term financial goal and understanding where to invest for retirement is not a difficult task at all.
Where to invest for retirement ?
Since retirement is long term in nature, the best bet is equity investment. Equity has known to return the most among all asset classes, however, only over a long period of time – long term investing is the key here. Do not take exposure to equity if you want to make quick gains.
Here is a 4 minute video (courtesy : NDTV Profit) with Monika Halan talking about where to invest for retirement.
In equity, buy direct stocks if you have the capability to stomach the ups and downs of the stock market and can understand the financials of a company. If you cannot, go in for equity mutual funds. Mutual funds are the easiest way to riches for the small investor, so take best advantage of it. Opt for systematic investment planning when you go for the mutual fund route.
Obviously you cannot take full equity exposure at any given point in time. There is some debt that needs to be thrown in your portfolio as well.
The best retirement tools in debt are public provident fund (PPF) and New Pension Scheme (NPS). These are the safest long term products meant for retirement.
Avoid putting your money in other debt avenues like fixed deposits and bonds. The returns after tax are pathetic – such products are not meant for long term goals like retirement at all. It is important to understand that one could still end up using these avenues but this might not be the most efficient way to do so.
Another avenue to explore could be real estate. In line with your asset allocation, one should buy real estate to generate some passive income in the form of rentals during retirement. This could be useful given the fact that you would stop bringing home your pay packet after 60. Real estate also appreciates over a long period – it is second in line after equities as far as returns are concerned.
It is essential, as the video tells you, that having a second source of income helps a lot after you retire. Rental yields could possibly be one such source of income. Do look at real estate for building a corpus for retirement.
Where not to invest ?
Your insurance agent would want to peddle you with an endowment plan or a money back plan for your retirement. He could even talk about pension plans. The most (in)famous product is the ULIP – it’s been historically sold as an investment product. While some of these products like ULIPs invest in the stock markets while others like the traditional insurance policies don’t, avoid all of these.
Insurance is not meant for investment and we will park that discussion for another day, but do not look at any insurance policy for building a corpus for retirement. Sure, one could possibly take this route but I do not advise that at all. It is not the most efficient way of building your retirement corpus.
Do not look at debt products like fixed deposits and small savings schemes like NSC to build your retirement nest egg.
Let us recap :
Invest in :
Real Estate
Direct Stocks
SIP of equity diversified mutual funds
PPF
NPS
Avoid :
All kinds of Insurance policies
Debt other than mentioned above
Last word
Obviously to get to a healthy retirement state, one need’s to plan well in advance. The best age to start would ideally be 25. The power of compounding works it magic and will build a corpus which will sustain you in your old days. If you plan after 40, it could possibly paint a very sordid picture.
Retirement should be the most important goal as with our current “westernization” of culture, more and more nuclear families are springing up. Our kids are going away to work from home and it’s very clear that they might not support us financially.
In our hey days, it’s just the husband and wife who need to cater to each others needs. In such a scenario, being financially, mentally and healthy ready for retirement is very important.
Where do you invest for retirement planning ?
Hi,
I like your cautioning people about the risks of stock investing and making sure people are aware of what they are getting into before hand.
However, I would caution you about saying which investments are “best” for people since it somewhat depends on how much you can save. If someone is an aggressive saver, they can get by with a lower projected return.
Also, real estate is not easy for an older person to manage and I have done quite a few analyses where the owner of the real estate is earning at best a 1% yield (because the owner wasn’t including maintenance, vacant time, and other factors into the ‘cost”).
Generally though good heads up for people – as far as best places to invest, I can’t answer for everyone but I try to look for ideas that individually, at the moment provide a very good risk/reward ratio meaning it could be anything:)
Chris Grande
@Chris Grande, Agreed on the point that real estate can become a real pain for an older person. The rental yields in this part of the country are a bit more than 1% though. Would you still classify fixed deposits as good avenues for retirement planning even if they have a good risk reward ratio ?