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Retirement Planning is About Building Corpus, not Buying Pension Plans

By Investment

Retirement Planning is About Building Corpus
If you ask a financial advisor on how should you plan for your retirement, the immediate response that you get is to buy a pension plan. Pension plans are being pitched as a product, by some people, which are presented as panacea for all your pension requirements. Some of these pension plans are ULIPs while some others are traditional pension plans. Very few people are aware of the fact that there are two mutual fund houses which offer pension plans in form of mutual fund with very minimal load factor. These mutual funds are UTI Mutual Fund and Templeton. However, this information is also immaterial in a way.

In context of retirement planning, what is often missed out is that retirement planning is all about building corpus and has probably very little to do with buying pension plans. No doubt pension plans can build the corpus for you, but are they indeed the best option. Just by buying pension plans all your worries related to pension will be taken care of. You need to stop and think. (Question of how much corpus to be built is not addressed as this article talks about how to build corpus). So what are the other alternatives?


Let me tell you that the first step in retirement planning is of course to start as early as possible. What is this exactly? Once you are sure that you have selected right career for yourself and you are in the right direction, start planning for retirement. So if you think that you would pursue MBA two years after your first job, it is better to hold your retirement planning for a while.

First step in retirement planning is buying a house once you start earning after selecting right career path. Buying a house and retirement planning! Did you hear it right? Yes, retirement planning starts with buying a house. It is not that house bought by you will provide you some kind of mental peace. Once you have your own house, when income from salary/business stops and all other income also dries up, you can use this house for ,’Reverse Mortgage’. One of the most recent financial innovations, reverse mortgage provides you with a cash flow against the house that you own. So you can secure your future by buying a house to a great extent.


However, the matter does not end with this itself. Let us go back to the concept of creating corpus. What does an insurance company or mutual fund do for you while offering a pension plan? Just build a corpus. You can do this yourself or with the help of a financial planner (Not advisor). So let me give you my view on building retirement corpus. I suggest you to go for the following when you are building corpus:

1) Buy conservative low beta stocks: You should directly purchase stocks which are low beta conservative but performing stocks. Some examples are ITC, BHEL, NTPC etc. These stocks offer you regular dividends as cash flow and appreciate in value over a period of time to build corpus. So ITC was around Rs. 25 in 2000 and it currently trading at around Rs. 190. Eight times growth in 10 years is a good deal. All dividends have of course being ignored in this scenario. There are many such stocks. Research yourself or read regularly to buy such stocks.

2) Invest in quality debt: Quality debt means the debt issued directly or indirectly by the government. So invest in VPF (Voluntary Provident Fund), PPF (Public Provident Fund), fixed deposits and long term bonds which are offered from time to time by financial institutions. This element of retirement planning will help you diversify yourself retirement portfolio and reduce overall portfolio risk.

3) Invest in Bullion: Gold is and will continue to hold its position as a preferred investment option. The world has moved from one currency standard to the other but gold has not lost its significance as an investment instrument which is capable of generating returns which can beat inflation. No need to say that rather than buying gold ornaments, it is better to go for gold ETFs.

4) Look for new opportunities: As economic scenario changes, you may come across new products which are available for investments. Currently recurring deposits are talk of the town. They are offering returns as high as 9.25% to 10%. No harm in parking a part of your disposable income in such products.

Once you have built corpus, ninety percent of the job is done. The next step is to deploy this corpus. The corpus can be deployed in MIPs, Post office deposits including senior citizen etc. You can also buy annuity plans, if desired after corpus has been built. Please remember that the focus of retirement planning should always be building good healthy corpus and you should work with this goal in mind.


Story first published: Wednesday, October 5, 2011, 10:17 [IST]
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