Best option for Retirement Planning–Mutual Fund or Pension Plan?
Mutual Fund or Pension Plan? Which one is the Best Retirement Planning? Very often I find this question in various online platforms. Yes! Ideally one should put in lots of efforts in deciding or finding the Best Retirement Planning option.
So, today I have decided to discuss on Mutual Fund or Pension Plan? Which is the best-suited option for your Retirement Planning?
We earn now for making our livelihood and we save and invest to secure our sunset years i.e. for the post-retirement period.
It is quite imperative for everyone to save for the future. Because it is visible that both our physical and financial health gets distorted as we grow older. Most of the people’s financial burden falls in place when they are nearing their retirement.
Also, in most of the cases, we can see that our age-old problems pop up at the time of retirement or after retirement. Cost for medical treatment and medication takes a substantial portion of your monthly expenditure.
Therefore, this part of your life should be given priority while your earning is in full swing. But statistically, you can see that we are quite reluctant to give this equal important.
As I wrote earlier that we, the Indians are really very poor in making a sound retirement plan. Majority of salaried persons due to non-planning for retirement have to compromise with post-retirement life.
Lack of financial planning and understanding sometimes force them to withdraw money from their one and only retirement fund i.e. Provident Fund.
One must ensure to keep his PF accumulation intact for his sunset years. But maximum salaried class people tend to withdraw it either for child’s marriage, education or for buying a house for them.
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Retirement and pension plan are synonymous terms. Once we are thinking for a retirement plan, we tend to go for pension plans. There are numerous pension plans available in India right now.
But the question is are they really best suited for you? Have you ever questioned yourself ? Have you ever checked the returns of the pension plans? I think for most of the people the answer will be a big “No”.
While planning for retirement we must keep in mind that retirement planning goes through two different phases viz; 1. Accumulation phase and 2.Distribution phase.
- Accumulation phase: During this phase, the investor invests regularly over a long period of time for retirement. A disciplined and systematic approach helps in accumulating a substantial corpus;
- Distribution phase: During this phase, the investor starts receiving a regular income, which may be on a monthly, quarterly, semi-annually or annually basis. This income payout is based upon the accumulated value when payments begin.
Based upon risk profile, age of the investor and time horizon of the investment, an investment can be classified as below:
|Age Bracket||Investment Risk Profile|
|Under 30 years||Aggressive|
|30 to 40 years||Moderately Aggressive|
|40 to 50 years||Balanced|
|50 to 60 years||Moderately Conservative|
|Above 60 years||Conservative|
One should move his investments to a lesser risk portfolio once the retirement is closer. One must adhere to this standard principle of retirement planning strictly without fail.
Else, you would see that your accumulated corpus at the time of retirement is not adequate to handle most of your financial liabilities and obligations.
Pension Plan or Mutual Fund? Which one to choose?
Pension Plan or Mutual Fund is the best tool for retirement planning
In a pension plan, a person pays a regular premium until his retirement and then receives regular payment from the accumulated corpus as pension or annuity.
Retirement plans or Pension Plans are primarily investment plans in which an individual invests till he retires and starts receiving pension once he retires.
Also, there is a provision to withdraw 1/3rd of the total accumulated corpus once he has retired to meet other financial goals and the balance amount can be received as a pension.
Mutual Funds as a tool for a retirement plan
On the other hand, Mutual Funds are very tax efficient. After the Budget 2018, with the introduction of 10% LTCG on Mutual Funds, still, they are very suitable product for retirement purpose.
Also, the income accumulated up to the grandfathered date 31st January 2018 is tax-free. The income generated from mutual funds over and above ₹1 Lakh is chargeable to LTCG @10%.
Still this is a safe bet and more tax efficient as compared to pension plans.There is no hidden charges or high administrative charges unlike conventional or Unit linked pension plans.
One can invest in Mutual Funds as per his own choice. The mantra is the early you start the more you grow. Power of compounding ensures that one can build a huge corpus for his retirement.
Notably, one can choose even 100% exposure to equity for long time investments. This can even fetch more than your expected corpus.
One must keep in mind that while investing in MF for retirement purpose, the risk profile, age and investment period can play a significant role during the accumulation phase. Prudentially, one should transfer his equity investments in less risky instruments gradually once retirement age is nearer.
Once the individual attains retirement age, he can choose one of the following options to get monthly payouts.
- Pension option: Receive regular income till perpetuity and leave the accumulated investment in the fund;
- Lump-sum option: Withdrawal of full value and invest as per own choice;
- Combination option: Withdraw a partial option and continue to receive monthly payouts from the remaining corpus;
- Flexible option: For receiving accumulated principal and dividends set a fixed amount per month for withdrawal over a certain period of time
Mutual funds as retirement plan are a very good option for investors who seek to plan for their golden years.
I personally, suggest Mutual Funds over Pension plans due to wide variety or range of products managed by professional experts, diversified portfolios, low-cost products, liquidity, transparency, no hidden charges and full watch by a strong regulator SEBI.