Early planning for retirement is imperative in today’s age wherein advancements in medical science have helped increase life expectancy. In addition, a wide choice of career options and a fast paced life has evoked the thought of early retirement in the minds of the younger generation. With increased longevity and the urge to maintain a similar lifestyle in one’s post retirement phase as well, the need for appropriate retirement planning is an imperative.
According to HDFC Life Value Notes Life Freedom Index, a survey conducted in 11 tiers 1 and tier 2 cities to understand the current state of financial planning in urban India, consumers are skeptical about the adequacy of their financial plans to meet their desired standard of living throughout their lifetime. In fact, only 13% of youth and women are extremely confident that they have adequate retirement planning in place. Though the Wisdom investor segment (45 years and above) scored better in the level of confidence yet their percentage stood at only 24%.
The study clearly points out that while we postpone a lot of simple joys of life to our retirement period, we do not adequately prepare ourselves during the prime time of our working lives to focus on building a war chest. These joys could range from travelling to cherished destinations to owning much coveted luxury goods or simply indulging in an expensive hobby.
In the absence of a formal social security framework in our country and inadequate statutory retirement funding (by both employers and self), there is a greater need to evaluate in advance the options available for retirement income planning. A clear definition of our Retirement Plans is the first step towards adequate provisioning for retirement. The answer to this lies in two basic questions – “HOW MUCH MONEY would we need when we retire?” and “WHAT PART OF OUR INCOME should be invested towards building that corpus?”
Having quantified our retirement needs, we need to also look at suitable instruments that are tailor-made to fulfill such needs. Let me talk about two such instruments which are customized towards fulfilling retirement planning goals.
Pension and Annuity
An exclusive category of products offered by Life Insurance companies in India is Retirement Solutions, which is a culmination of two phases – accumulation phase when we build our retirement fund by investing in a Pension Plan before retirement and redemption phase in the form of regular and guaranteed income for life post retirement through an Annuity plan.
I feel that Pension and Annuity plans should never be looked at in isolation. They are two sides of the same coin. A combination of these two plans is a good investment avenue that takes care of longevity risk, i.e. risk of us outliving our savings.
The key benefits of a Pension and Annuity combo are:
Flexibility to choose the tenure depending on one’s retirement age
Hassle free transaction giving the process an OTC feel (online options available)
Advantages of tax efficiency under sec 80 CCC and 10(10A) of the Income Tax Act 1961
Derisking from market volatility once Annuity is purchased
Benefit from the power of compounding commences early
Ensuring by virtue of regulations that funds for retirement are actually utilized accordingly
Wide range of Annuity options to choose from (including Return of Premium) and ability to customize features like payment modes etc. as per need
Doing legacy planning for loved ones
National Pension System
National Pension System (NPS) was introduced by the Government of India with an objective to extend old age security coverage to all citizens. Launched in January 2004 the scheme is now more than 10 years old. At inception the scheme was made compulsory for all new Central Government employees (excluding Armed forces) by scrapping the old pension structure for them and that was soon followed by the State Government employees as well. It was only in May 2009, that the scheme was made available for all citizens of India.
In the basket of investment tools currently available in the market NPS clearly stands out. It offers subscribers the option to choose service providers, fund managers & investment schemes along with flexibility to switch amongst the same if desired. The NPS account is fully portable and offers an online platform that enables subscribers to access their account details 24X7. The NPS contributions also provide subscribers with an additional tax savings under section 80 CCD (2) benefit as per the Income Tax 1961.
Retirement planning is an ongoing and systematic process. It is advisable that we introspect, study our needs and aspirations, draw a timeline and observe discipline in doing so. The earlier this process is initiated, the better it is, as we can gain from the power of compounding as well as aim for a higher return in order to lead a comfortable life in our golden years.
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