Mr Sunil Verma and his wife Anita waited for their retirement to take that world tour that they dreamed of in their prime. Their working years passed by in a jiffy and they spent it well raising a family and performing other duties. Since their was no time for a tour, they decided to catch a breadth only at the end of their work life. They planned the places to visit, but they didn’t do any retirement financial planning. Now, when they are above 60 years of age, not only are they unable to fulfil their dream tour, they are also penniless and dependent on their children to support them.
Retirement planning is necessary to maintain a comfortable lifestyle in the sunset years. It is better to start planning for retirement early so that you have a longer timeframe to invest for the future. Apart from investing, it is also important to keep a few macro-economic factors in mind such as inflation. Despite raising financial awareness, many people stick to traditional Provident Fund and Public Provident Fund to build their retirement corpus. But is that enough? Taking inflation into account, the amount of PF on retirement may not suffice to last your lifetime.
The first step to retirement planning would be to evaluate your life expectancy as that is the number of years you will survive without an office income. With easy availability of medicines and treatment, life expectancy has gone up. Life expectancy is different for every individual dependent on the family’s health history and individual’s lifestyle. In India, on an average, life expectancy is above 65 years.
So now you know your current age, retirement age, years to retire and years after retirement. You also know the time left for you to invest for the future.
The next thing to determine is the corpus of money that is required during your retirement. To determine this amount, calculate the recurring expenditure at home for services and food. Know the current rate of return on investments and the rate of inflation, which is one of the biggest demons of present and future times. With these, you need to calculate the real rate of return that your investments will yield. Real rate of return is the percentage return or adjusted rate that includes rise in prices due to inflation. It can be calculated with the help of the following formula:
Real Rate of Return = (1 + nominal rate / 1 + inflation rate) – 1
With the help of these numbers, you need to calculate the expenditure that you will incur at the time of retirement. However, just knowing the expenditure or having saved just that is not enough. This amount has to be multiplied with the number of years after retirement to know the actual corpus for the whole period of retirement. Divide this with the number of years left for retirement and you will know the annual amount of investment required to save for your future.
Once you know how much you need to save, start investing accordingly. Most of the people make the mistake of sticking only to the provident fund schemes for their future. It is always better to diversify your portfolio and not to rest all eggs in the same basket. There are a number of options from which you can choose. Some of these are as follow:
Mutual funds – One of the best options for long-term investment is mutual funds. Mutual funds also offer hybrid pension plans that distribute its investments in debt and equity funds. You can either invest a large sum at a go or use the systematic investment plan (SIP) to spread the investment burden over a longer period of time. At the time of maturity, which is during retirement, the money can be withdrawn all at once or in parts in the form of a pension.
Annuity plans - A number of mutual fund houses offer annuity plans such as SBI Life Annuity Plus, HDFC Life New Immediate Annuity Plan, ICICI Immediate Annuity Plan. An annuity is an insurance scheme that provides for money at a future date. Apart from these, you can also check the Max Life Forever Young Pension Plan, Bajaj Alliance Pension Guarantee Pension Plan, Bajaj Alliance Retire Rich Pension Plan, Max Life Guaranteed Lifetime Income Plan, HDFC Life Click 2 Retire Plan, HDFC Life Personal Pension Plus Plan etc.
LIC – The Life Insurance Corporation of India keeps launching new retirement scheme for customers at regular intervals. At present, the insurance giant is offering two retirement plans:
- LIC Pension Plan – Jeevan Akshay VI
- LIC Pension Plan – New Jeevan Nidhi Plan
National Pension Scheme - The government opened the National Pension Scheme to all sections in 2009. Prior to that only government employees could subscribe to the scheme. It starts with the minimum investment of Rs 6000 annually and is one of the cheapest market linked pension schemes.
Public Provident Fund – The Public Provident Fund (PPF) is one of the most sought-after schemes. Investments in the PPF are exempted from tax under Section 80C of the Income Tax Act. One can invest any amount between Rs 500 to Rs 1.5 lakhs annually for an initial period of 15 years. Beyond that the funds can be extended for 1 or blocks of 5 years. The interest rate as on July 1, 2017 stood at 7.8% per annum.
It is best you build one’s own portfolio for retirement planning including a mix of schemes from those mentioned above. Starting early to invest will give you the opportunity to build a larger corpus. For example, if you need to save around Rs 5 crore for your retirement at 12% rate of return and you start at the age of 20 years, you will need to invest Rs 4,207 a month and Rs 7,698 if you start to invest at the age of 25 years.
One should also keep in mind the medical expenses that you might incur after retirement. It is always better to keep this in mind before investing.
Some people also desire to retire early and that reduces the number of years to save. You can plan your own retirement or consult a financial expert for advice. Let money not be a woe in the twilight years but only an aid to accomplish a care-free life.