Do-It-Yourself Retirement Plan
A basic DIY retirement plan that's easy to execute and works for you
Using concepts outlined in following links
Basket 1. First ascertain, how much money you need in next 2 years (2 years expense including discretionary and non-discretionary). Put this amount partly in Bank account (obviously with an ATM/debit card), and rest in short-term / ultra-short term debt mutual funds.
Basket 2. Now ascertain an approximate amount of money needed in next 3-4 years (This is just an approximation again). Keep this amount into a dynamic bond or income fund.
Basket 3: The rest of the money, keep in different assets. For simplicity sake, use a 50:50 equity / debt allocation and keep money in a single debt income fund and a single well-managed conservative equity fund.
- 1.Use SWP (Systematic Withdrawal Plan) to withdraw the monthly requirement from the short-term fund (Basket 1).
- 2.Every year, recheck things on the same basis, namely, ascertain next 2 years, then additional next 3 years and then the Basket 3 allocation level. Use switch to remove money from baskets 2/3 into basket 1, as per the requirements.
- 3.If the allocation levels in basket 3 are way out of proportion, remove money from the higher allocation amount into the other baskets or into the other fund.
Eg 1, you started with 50 L in basket 3 and allocation 25L each in a debt and an equity fund. In next year, your amounts changed to 30L in equity (an increase of 20%), while the debt fund increased to 27L (8%). Plus, you have a deficit of 2L in baskets 1 and 2 according to your calculations. In that case, you should remove 2L from the equity fund into baskets 1 and 2 as per deficits.
Eg 2: If next year, the equity fund decreases by 20% to 20L, while the debt fund increases to 27L, and you require 2L again. In that case, you remove 2L from debt fund, and you transfer 2-3 L from debt fund to equity fund to re-balance the 50:50.
Why not a Pension Fund?
- 1.Because of numerous charges, which are not beneficial. Check Section 2. After all, you just need to invest into a debt or an equity fund, which are easily available elsewhere.
- 2.The lock-in of pension funds does not add into the overall return. On the contrary, the loss of liquidity in such plans is a double whammy. You lose liquidity as well as returns.
- 3.At the end of these plans, you have to buy annuity from the insurance providers, otherwise, you risk paying a lot of taxes (At present, 33% is tax-free as cash to you, but the rest is not tax-free unless you buy an annuity).
Why not opt for an Annuity?
Annuity is basically a way of converting a corpus of money into regular income for the retirement years. There are different types of annuities available, though, the variations are very less compared to those available in the west.
- 1.Annuities are taxable. They are treated as income and accordingly, applicable taxes as per the amount.
- 2.Presently, they invest mostly in debt products (probably, since the structure of most of these products is not transparent). The rates are anywhere from 5-9.5% depending upon various options like return of premium, joint life plans, etc.
- 3.Biggest problem is 'the annuity amount is fixed'. So, x amount maybe good for next 1-2 years, but after 5 years, the same x amount will be inadequate, assuming you want to maintain the same lifestyle.
Additional advantages of DIY Pension Plan?
- 1.The use of SWP in a debt plan is treated in a better manner than other options (including senior citizen FDs).
- 2.The presence of Equities should help in having above inflation returns over a longer time frame.
- 3.The entire corpus remains in your name, and it can be transferred to whoever you want (children, grandchildren, etc). And not to the insurance company.
- 4.Keeps the liquidity and flexibility of your own money in your hands. In case of emergency, you can use your money.
What are the Disadvantages of a DIY Pension Plan?
- 1.It makes you responsible to maintain the entire stuff.
- 2.It is a bit more complicated to understand and do, particularly for elderly. So, mostly this will either require some assistance or a web-savvy elderly person.
- 3.If one starts looking at individual components of basket 2 and 3, then it can happen that in some years, the valuations of those individual funds can change drastically, mostly of the equity fund, and that can create emotional issues and lead to panic selling. Also, the individual funds may not be or remain 5 star funds in very month/ quarter or year. One just needs the funds to give you proper exposure to the desired asset class, with reasonable management fees, and with a decent performance (which may or may not be the best performance).