How To?

What is Retirement Mutual Fund and How to Calculate It

Personal Finance

The word retirement suggests getting away from work and spending your life doing something you enjoy. However, that’s only a part of what retirement is.

When people talk about retirement, they typically refer to the point when you stop working and take advantage of the benefits provided by your employer’s retirement plan. This is also known as an individual retirement account (IRA).

Let us learn all about retirement planning and the best mutual funds for retirement.

What is a Retirement Mutual Fund?

A retirement mutual fund, also known as an annuity, is a type of investment that pays you a regular monthly income. It’s one of the most common ways people use their money to ensure they have sufficient resources once they retire. Insurance companies offer two types of retirement mutual funds: defined-contribution and defined-benefit plans.

Defined contribution plans let you decide how much money you want to invest each month. On the other hand, defined benefit plans work differently. Here, the company decides how much money it will contribute each month to the employees’ retirement pension plan. The amount is decided by the company’s board of directors.

Different Methods  to Invest in Retirement Mutual Funds

There are two methods of investing in retirement mutual funds:

  1. Lump Sump Investment:

It is also known as a big money investment or investing all the money at once. This method is preferred by those with a large sum of money and a high appetite for risk.

  1. Systematic Investment Plan

With SIPs, investors invest a fixed amount of money monthly to accumulate capital. SIPs are advantageous to first-time investors. It is because they instill the habit of investing, which allows the money to accumulate gradually. It is a product that lets the wealthy invest money in the stock market without risking their finances.

How to Calculate a Retirement Mutual Fund

A retirement mutual fund is an investment option that acts as a retirement pension plan. When you invest in a retirement mutual fund, you buy shares of the fund. Funds offer diversification, which means your money is spread out over different investments (stocks, bonds, etc.).

There are various steps involved in the process of calculating a retirement mutual fund:

Step 1: 

  • The first step in calculating your retirement mutual fund is determining how much money you need.
  • To do so, consider all your sources of income and social Security. You should also calculate your retirement expenses, like medical bills or travel plans. Lastly, consider inflation rates.

Step 2:

  • The second step is to determine how many years you have until you retire. This can be done by subtracting your current age from the years until retirement.
  • Once you know this number, divide it by 100. Next, multiply it by your desired yearly contribution amount to calculate how much money you would need every year before retiring. For example, if you’re 30 years old with 20 years until retirement, divide 20 by 100 = 0.2 multiplied by desired yearly contribution amount = Rs 20000 per year or Rs 4000 per month.

Step 3:

  • Your desired yearly contribution amount should not exceed 15% of your gross salary. So, for example, if your gross salary is Rs. 1 lakh rupees per month, then the maximum you should contribute is Rs. 15,000.
  • If you want to get additional tax benefits while investing in a retirement mutual fund, make sure to file your tax return correctly. Additionally, making contributions monthly instead of annually is good practice because it reduces the risk of underfunding your account.

Step 4:

  • The third step is choosing an appropriate retirement mutual fund. There are different varieties of how to choose a specific type, but they can be divided into three categories: low-risk, medium-risk, and high-risk.
  • Low-risk funds typically have lower returns than medium or high-risk funds. But they don’t usually fluctuate too much. They tend to stay more stable over time. Medium-risk funds are somewhere between low and high-risk funds. High-risk funds are not recommended for people needing their money in the next few years or retirees whose nest eggs will last only ten years or less.
  • These funds fluctuate significantly in price and could lose money even during economic growth.

Step 5:

  • Once you’ve chosen a fund, create an automatic withdrawal from your bank account. Fix it for each month and fill out the form at the financial institution where you’re opening the new account.
  • Keep track of any taxes due on this amount through quarterly tax payments. Finally, set up auto withdrawal for all future contributions, so there is no lapse in retirement savings.
  • In general, the higher the potential risk, the higher the potential reward; thus, someone saving for long-term needs may decide to go with a higher-risk fund, whereas someone closer to retirement may go for one of the low-risk funds.

Advantages of Buying a Retirement Fund 

Here are the benefits of retirement planning:

  • Planning for your retirement is a key aspect of a robust financial plan. A retirement fund helps you receive a steady income when you retire. It can be accomplished by investing in a retirement fund.
  • Among the best benefits of investing in a retirement fund is the options it presents regarding the income stream you desire. Unlike an NPS product, where you’re required to invest in annuities, this fund will let you choose between pension-like retirement payouts or a lump sum payment.
  • Retirement investments up to Rs. 1,50,000 annually are eligible for tax deductions under Section 80CCC. However, returns will be subject to taxes depending on your tax slab.

Summing Up

A retirement mutual fund can be an investment vehicle that allows you to diversify your investments in stocks, bonds, money market instruments, cash equivalents, and other securities.

A retirement mutual fund invests in the shares of many different companies, which reduces the risk for investors because the losses of any one company won’t affect the entire portfolio. To learn more about a retirement pension plan, visit Piramal Finance.