How to plan your retirement in India?

Retirement plans are special investment plans that allow you to save money for retirement in a systematic and disciplined manner. You contribute a specified amount of money to the plan on a regular basis, so that by the time you retire, the plan has amassed a sizable corpus of funds. Retirement plans frequently offer both wealth accumulation and insurance coverage. Here’s what you should know about retirement planning.

How a retirement plan works?

A retirement plan will secure your life after you retire. For example, suppose you are 32 years old, earn INR 50,000 per month, want to retire at 60 years old, and expect to live to be 80 years old. The first thing you should do is calculate how much money you will need each month during retirement. You must consult with a financial advisor to determine the following steps:

Calculate your current and expected future income, including investment income (I).
Calculate your current expenses and outflows during retirement (II)
Calculate your requirement – This is the difference between (I) and (II), and it will tell you how much money you need to retire comfortably and securely.

You need a suitable retirement plan to achieve this, can begin contributing to a retirement plan based on calculations that take into account an expected rate of return and average inflation over time. This is how it will function.

Accumulation phase

You have the option of paying a lump sum or making periodic contributions. In either case, the money contributed will grow over time to form a sizable corpus. Your retirement plan is currently in the accumulation phase. The accumulation period in our example would be 28 years.

Benefit from the power of compounding

Your money will be invested further to generate the best risk-adjusted returns. It is recommended that you purchase a retirement plan as soon as possible in order to maximise the return potential of your plan through the power of compounding.

Vesting age

This is the age at which you will begin receiving your pension, which is 60.

Payment period

This is the time frame for which you will receive pension payments after retiring. In our example, if you plan to receive your pension between the ages of 60 and 80, your payment period will be 20 years. This is annuity phase. However, depending on the plan you choose, you may be able to take a partial or full withdrawal during the accumulation phase as well.

Types of retirement plans

There are three main types of retirement plans:

Annuity plans
Unit Linked Insurance Plans
National Pension Schemes

1. Annuity plans

These are plans that are specifically designed to provide you with guaranteed income during your retirement period, either for life or for a set period of time. An annuity plan can be used to build a retirement corpus from which a regular income, known as an annuity or pension, can be earned after reaching a certain age.

Because it guarantees a fixed income, an annuity plan can protect you from outliving your savings. More importantly, because the payout is fixed for life, you avoid the risk of re-investment. These are the options that are appealing to those who want to protect their investment beyond their own lifetime:

Return of the purchase price to the nominee upon the death of the policyholder
Joint life Annuity: In this case, the spouse receives a pension income even after the primary policyholder dies.

Annuity plans are classified into two types:

Immediate annuity

If you choose an immediate annuity, you will begin receiving your pension within one year of paying the premium. As a result, you can begin receiving annuity payments as soon as you make the initial investment. If you are nearing retirement, this plan is ideal for you.

Deferred annuity

If you choose a deferred annuity, you can choose the timeframe or period over which you want to receive the annuity from the insurance company. This type of plan is best if you are still working and have a few years before retirement.

2. Unit Linked Insurance Plans

These plans offer you the dual benefit of insurance coverage coupled with an opportunity to generate investment returns.

You can find more information on ULIPs here.

3. National Pension Scheme

This is a voluntary retirement plan that can be very helpful in accumulating the desired retirement corpus. It is open to all Indian citizens between the ages of 18 and 65. Furthermore, you can start an NPS at the age of 60 and continue to contribute until you reach the age of 70. When you reach the age of 60, you can withdraw 60% of the fund from your retirement account, either all at once or in stages. The remaining funds are used to purchase an annuity.

NPS accounts are classified into two types.

Tier-I – This is a retirement account that must be opened when investing in NPS. This account allows withdrawals only after you reach the age of 60. However, partial withdrawals are permitted under certain conditions.

Tier II – This is similar to a savings account. There are no restrictions on withdrawals as a result of this.

First, let us look at how NPS classifies asset classes.

Asset Class E – equity market instruments.

Asset Class C – fixed income instruments that are not government securities.

Asset Class G – Government securities

Asset Class A – alternative investment funds (AIFs)

Let us now examine the asset class bifurcation based on your investment strategy.

Active

You can choose how much money to put into each of the four asset classes mentioned above. As you get older, your maximum allocation to Asset Class E decreases. For instance, if you are 50 years old, you can only invest up to 75% of your portfolio in equities (Asset Class E). Furthermore, your Asset Class A allocation cannot exceed 5% of the portfolio.

Auto

Your age determines the asset allocation in this option. There are three options within this: aggressive, moderate, and conservative.

Why should you buy retirement plans?

You should purchase a retirement plan to ensure that it is everything you imagined it to be. Here is a list of reasons why purchasing a retirement plan will be one of the best decisions you will ever make.

Age is merely a number: According to a United Nations report, the proportion of the Indian population over the age of 60 is expected to rise from 8% to nearly 20% by 2050. However, you do not have to bury your dreams and ambitions once you retire. Instead, think of it as the start of a new journey, albeit one that will require more financial support.

Medical inflation can be a silent killer: As you get older, your health-care costs will rise. Furthermore, the cost of maintenance is rising as medical inflation quietly raises your bills. This could have a negative impact on your health and well-being if you do not receive adequate financial support.

Reduce dependence: Previously, the joint family system in India cares for senior citizens in the house. However, times have changed. Not only is the joint family system disintegrating, but people increasingly want to be self-sufficient in their old age. If you want to be self-sufficient after the age of 50, you should start planning for it as soon as possible.

Lack of adequate social security: In comparison to countries such as Sweden, which are well known for their visionary and sophisticated social security systems, India’s is relatively bleak and insufficient. If you run out of money after retiring, Federal Government supports no fall back plan. A suitable retirement plan can be of great assistance during your retirement years.

Bottom line

It is never too early to begin thinking about retirement. In fact, if you begin planning for your retirement early on, you will put yourself in a fantastically advantageous position.

Once you’ve begun, keep investing for retirement in a disciplined manner. This is where retirement plans can help, as they not only help you build the desired corpus but also instill investment discipline.