Retirement planning & investment avenues with rule 72

Saving for retirement and planning for retirement are two different things. Before we plan for retirement, let's have a look at the 'Rule of 72'. By dividing 72 by the rate of return, one can get a rough estimate of how many years it will take for the initial investment to double. Also ensure that, the real rate of return (the return after inflation) has to be positive to ensure that we've sufficient corpus to last the retirement period. Now that we have an idea about the 'Rule of 72' and the need for real rate of return, lets get into the investment avenues

Mutual funds

One of the understated but a very important tool for generating the retirement corpus is mutual funds. Early in the career, invest in equity MFs which would generate the alpha and have the retirement corpus grow. Invest in a mutual fund through the SIP route. This brings in discipline in investment (all the more important as one is investing with a longer time horizon). Do remember, without equity in one's portfolio, one is a sitting duck for inflation eating into the capital. Besides this, have an asset allocation in place to ensure that investments are accorded as per the risk profile.

Direct equity

If you have the time and inclination with a fair amount of risk-taking ability, direct equity is the place to be in. This decade should see Indian stocks doing good and investing in stock specific scrips, should enable one to build up a sizeable corpus.

Pension scheme of insurance firms

When one thinks about retirement, the pension schemes of insurance companies seems to be the most common and easiest route. And most of us would have one in our portfolio. With the new Irda guidelines, stating a minimum guaranteed amount to be paid, time will tell how this product will fare in the new regime. To ensure that a guaranteed amount is to be paid, higher allocation of investments will be in debt products, which may or may not generate a real rate of return, exceeding inflation.

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