I am finalising my investments to save tax. I am 26 years old and earn Rs 4 lakh a year. I invested Rs 4,000 in an equity-linked savings scheme (ELSS) and Rs 4,000 in an equity-diversified fund. I will use this money for long-term goals (buying a house and for retirement). Last year, I could not take complete advantage of the Rs 1-lakh deduction allowed under Section 80C of the Income Tax Act. I was short of Rs 25,000. I invested in an equity-diversified fund. I believe that over the long term, this category will fetch better returns than tax-saving schemes. I need to know whether I should stick to this allocation or should I consider tax saving as the primary goal and invest more in it?
It is important that you save tax and exhaust the limit of Rs 1 lakh, especially as going forward, your income will be taxed at higher slab rates. The Income Tax Act has been drafted to provide you various investment options like provident funds, five-year term deposits, principal repayment of housing loan and life insurance premium, all of which can be used to fund your long-term goals such as retirement. These also give you the option to have an appropriate equity and debt mix in your portfolio.
An ELSS investment of Rs 4,000 per month fits with your long-term goal and is also a tax-efficient. Retirement funding can be done through other investment avenues such as public provident fund, which is quite safe.
Going forward, you may increase your systematic investment plan amount for funding other family goals. We suggest you select an appropriate ELSS fund having a good track record.
We also suggest that you transfer funds from equity to safer investment avenues in a systematic manner as you approach your goal.
What is longevity risk and how does it affect retirement planning? I am 48 years old and have been saving Rs 15,000 for the past 10 years for my retirement. I am doing this through mutual fund investments. To maintain my current lifestyle, I will need Rs 25,000-30,000 when I retire in 10 years.
Longevity risk is a term used by insurance companies and pension funds. It is generally associated with payments required to be made if the policy-holder or the insured lives beyond the expected life. This is generally associated with increase in life spans.
Longevity risk has an impact on retirement planning, since the investor has to fund for the expense.
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Assuming an expense of Rs 25,000 per month, after 10 years, adjusting for inflation and assuming a post-retirement life of 25 years, the corpus required to be accumulated at the time of retirement will be Rs 54.75 lakh.
Assuming you have had been investing Rs 15,000 for the past 10 years, we suggest a monthly SIP of Rs 19,500 to be made in an aggressive portfolio in a systematic way, generating an internal rate of return of 12.6 per cent.
The writer is founder & CEO, Freedom Financial Planners. Send your queries to your money@bsmail.in