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Whats in it for you
Throughout your working career, you strive hard to achieve your dreams and offer your family all the comforts that life has to offer. But, have you planned on how you will manage your lifestyle post retirement? Retirement planning enables you to continue living life on your own terms and to enjoy a good standard of living even after retirement.
In the Indian context, retirement planning assumes greater significance due to the following reasons:
>> Absence of mandatory provision for pension:
A large proportion of India is self-employed or works in the unorganised sector and does not benefit from any state or employer-sponsored post-retirement scheme.
>> Increase in life expectancy:
Increasing life expectancy coupled with increasing desire to retire earlier means a longer retirement phase.
>> Rise of the nuclear family system:
As per HSBC’s ‘The Future of Retirement Report - India Fact Sheet’ published in 2011, high percentages (~32%) of Indians want to live with their children after they retire. This is more than twice the global average. However, the transition from a joint family system to independent nuclear families, especially in urban India, is a reality, and Indians need to plan for a financially-independent retired life.
>> Increase in cost of living:
Rising inflation, growing aspirations for better lifestyles and increasing costs of healthcare make retirement planning indispensable. When should you start planning for your retirement? In order to maintain a good standard of living post-retirement, you need to plan for retirement earlier.
Let’s take an example:
Ramesh invests Rs 25 lakh towards his retirement corpus, while Vikram invests Rs 50 lakh for this purpose. Despite investing less, by the age of 60, Ramesh accumulates Rs 1.08 crore, compared with Vikram’s accumulation of Rs 88 lakh. How did this happen? What Ramesh had in his favour was time. He began investing a sum of Rs 1 lakh per annum earlier, at the age of 35 years. Vikram, to compensate for lost time, saved five times the amount invested by Ramesh, that is Rs 5 lakh every year from the age of 50. This is the power of compounding. How to plan for retirement? You can build an ideal retirement plan in five simple steps:
>> Step 1: Arrive at how much income you would require to live comfortably post retirement. Remember to take into account aspects like inflation, increased medical costs, vacations and gifts for family. Also, eliminate costs like children’s education and rent, if you own your home.
>> Step 2: Establish the amount of corpus you require to generate your desired post-retirement income.
>> Step 3: Determine how much you need to save regularly. Start saving now so that you have time on your side and can enjoy the power of compounding.
>> Step 4: Select the right retirement plan that enables you to meet your post-retirement requirements.
>> Step 5: Systematically invest a fixed amount every month for your retirement. How to choose the right retirement plan? While you can invest in various instruments for retirement planning, you need to keep in mind that a sound retirement plan should provide returns that can beat inflation in the long term, provide a level of guarantee to safeguard your retirement corpus and ensure that this corpus is accessed only for the purpose of post retirement income.
At present, pension plans offered by life insurance companies and New Pension Scheme (NPS) are two good options for retirement planning. NPS offers a transparent and low-charge retirement solution. Life insurance companies too have revamped their pension plans and now offer a significantly enhanced proposition to customers. These pension plans allow you to build up a corpus and live a comfortable life after you retire from work. They are designed such that customers remain invested for the long term in order to accumulate an adequate corpus for retirement. Some products allow customers to choose their investment strategy. Based on the risk appetite, an individual can choose to allocate a part of his corpus in equity, thereby benefitting from potentially superior returns while protecting capital. The accumulated corpus is then utilised to get regular income post retirement.
Given the wide array of retirement solutions available, it is important for every individual to plan for retirement and start saving regularly. While awareness levels for retirement planning are high, most of us delay investing for it. Starting at an early age can significantly enhance realisation of your dreams to achieve financial independence in your golden years.
(The writer the EVP and head products, risk and corporate strategy at ICICI Pru Life Insurance)
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