Retirement Planning India – Guide. Retirement is a reality which everybody wants to postpone forever. As nobody welcomes retirement, the general tendency is to postpone retirement preparations also. The fact is that if you are prepared for this reality well in advance, you can welcome retirement life with grace and joy.
Be aware of your retirement needs
Needs during your retirement life are different from the earning period. Let us have a look at the characteristics of the retirement period (with particular emphasis on India).
Drop in income varies based on your work style and the profession you are in. But, invariably there will be a drop in income and you will have to face the retirement needs with lower resources at hand.
Even though the new concept of biological age is gaining acceptance over the chronological age, aging is a universal truth. And health deteriorates with age irrespective of how hard you try to maintain it. No need to add that the health maintenance expense is likely to grow exponentially with the linear increase of age.
With the emergence of the nuclear family concept and the career-oriented goal setting among the younger generation, parents are forced to spend retirement life away from the company of their children. This alienation has become the order of the day and retired people need to find additional means to cope up with the resultant stress and strain.
Why do we need retirement planning?
Retirement planning is necessary to maintain financial independence during retirement life. You may find it difficult to bring down your lifestyle despite lower income in the retirement life. Many people overlook the fact that retirement planning is a long process and start worrying about income at the fag end of their career.
You can work even after retirement to keep your self occupied but you cannot rely on it as your primary income. Further to add, work out put or the ability to work keep on decreasing with age.
You may be surprised to know that Medical Inflation rate hovers around 20% in India. If you haven’t saved enough, you may find it difficult to pay soaring high medical bills in the future.
In the modern era, living long is also considered as a potential hazard like dying early. The longer you live, the more money will be needed to meet expenses.
Retirement planning – When to start
As far as investment is concerned, the rule of thumb is that ‘the earlier you start the richer you get‘. The info-gram provided below will help you to understand the importance of starting the investment as early as possible.
If you start investing Rs 1000 per month and an expected interest rate of 8%, at the age of 25, the amount accrued by 60th age will be 23,09,175. Whereas if you could start investment only at age 40, the amount will reach only 5,92,947.
How much money should I have at retirement? – Retirement Planning
The key point behind successful retirement planning is ensuring the retirement fund to be large enough to meet all the retirement needs. For that, retirement needs have to be identified and properly quantified.
As shown in the info-gram provided below the most obvious retirement needs include:
- Ensuring a steady income
- meeting health-related expenses and
- maintaining the lifestyle.
Income Replacement Method
In this method, we decide a certain percentage of income which is required to maintain the retirement expenses. This ratio is called income replacement ratio. Usually 70% to 90% of the income before retirement is required to maintain the lifestyle of the individual after the retirement.
Expense Protection Method
In the expense protection method, the focus is on identifying and estimating the expenses likely to be incurred in the retirement years and providing for it. The expense protection method can provide a more accurate estimate of retirement income needed.
Retirement Planning Calculator
Retirement Calculator provided here uses expense protection method. Select your basic details such as age, retirement age, life expectancy(up to which year pension is needed), etc. and provide your current expenses. The calculator is designed to take care of inflation also. Knowing the retirement corpus and the savings you will need to create the corpus can help you to plan for your golden years well in advance.
If you cannot view the calculator here, click to open retirement planning calculator.
Retirement planning – retirement fund – tips to follow
Tip 1: Income – Savings = Expenses
In order to create a retirement corpus sufficient enough to meet the retirement needs, you have to be well disciplined in controlling the expenses. If your savings is just the left over of your income after all your expenses, you are not going to meet your corpus creation goal.
To do this properly, you should clearly identify your goals and estimate the inflation-adjusted corpus requirement and then find out how much you need to save for that.
Tip 2: Follow 50-20-30 Rule
If you have any doubt regarding the amount to be saved every month, follow the 50-20-30 rule. Out of the total income, around 50% will go as living expenses and limit 30% of income for life style related expenses. Thus you will be able to set aside at least 20% for savings.
Tip 3: Rule of 72
Rule of 72 can be used to calculate in how number of years your investment at a particular interest rate will double.
Years required for doubling = 72 / interest rate
For example, if the expected interest rate is 8 %, divide 72 by 8. So your investment will double in 9 Years. You can use 144 instead of 72 to know how many years it will take to triple your investment.
Tip 4: 100- age approach for equity investments
Equity investment can potentially provide good returns with inherent risk of losing capital at times. So investing all your savings on equity is never recommended. Rather an age based investment strategy is recommended by financial experts. The rule of thumb is to follow 100-age approach where the percentage of income invested in equity at a particular age is derived by reducing age from hundred.
For Example, if your age is 30 you can invest up to 70% of your savings in equity where as if your age is towards higher end you have to be more conservative and invest only lower percentage in equity.
Tip 5 : Home loan and Vehicle loan
Always try to keep aggregate EMI of all loans lesser than 50 % of your monthly take-home salary. Ideally the home loan EMI should be below 30% of your monthly income and vehicle loan below 15%.
Pension Schemes and Plans to help retirement planning in India
Several options are available in the Indian market to make retirement planning easy.
NPS – National Pension System
National pension system or NPS is a Government sponsored pension scheme where voluntary contributions and their investment returns are accumulated into a pension fund managed by fund managers. The pension fund is invested in annuity schemes designed by insurance companies later on to provide a steady annuity. Read complete details on National Pension System (NPS) and its tax implications.
PPF – Public Provident Fund
Public provident fund is another popular Government sponsored savings scheme where the applicable interest rate is declared on a quarterly basis. This is a 15-year scheme which can be extended further in five-year blocks thereafter. Maximum deposit allowed is 1,50,000 per annum. Payments towards PPF account, interest received and the withdrawn amount from the account is exempted from income tax. Read all the details on Public Provident Fund (PPF) you need to know.
Jeevan Shanti (Table 850) Pension scheme from LIC
Jeevan Shanti from LIC of India is a deferred/immediate annuity plan which can be used to invest the pension fund. Jeevan Shanti provides guaranteed life long pension with umpteen options to customize pension received. Jeevan Shanti provides insurance coverage also during the deferment period. Read complete details of Jeevan Shanti plan with pension calculators.
Atal Pension Yojana
Atal Pension Yojana (previously known as Swavalamban Yojana) is a government-backed pension scheme in India targeted at the unorganized sector. People below the age of 40 are eligible for a pension of up to Rs.5,000 per month on the attainment of 60 years of age.
Anish L J is a ‘Financial Planner’ and member of Chartered Insurance Institute(CII), London and Insurance Institute of India. He is also a finance, insurance and software consultant. He thoroughly follows the developments in finance, insurance, and other related sectors.