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What is a Retirement Plan or Pension Plan?
Understanding the benefits of investing in a retirement plan:
Retirement is that phase in life where all your major responsibilities are taken care of and you can enjoy a stress – free life that is more like a vacation. Now at this amazing phase of your life, finances should be that last thing you should worry about! Retirement plans provide you with financial stability so that when your professional income starts to ebb, you can still live with pride without compromising on your living standards. Retirement Plans are a category of life insurance plans that are specially designed to meet your post-retirement needs such as medical and living expenses. To ensure that you can enjoy your golden years with financial independence, with a tremendous increase in the cost of living it is essential that you start investing in a retirement plan.
Why You Need Retirement and Pension Plans?
Retirement is like a long vacation. Most of us have various dreams like traveling the world, spending quality time with their children overseas, having long lunches and siestas and pursuing your long-lost hobby, etc. which we plan to fulfill during our retirement phase in life. While these dreams may seem exciting they also need some amount of funding. It is important to plan for your retirement in advance. India’s consistently high inflation is noted as one of the big concern. This is why, timely investment in retirement plans is very crucial. Retirement Planning can provide you a stable source of income even after you stop working.
Increasing retirement years: With average life expectancy increasing in India, it has become increasingly important to plan for a longer retirement. The life expectancy figures indicate how long an average individual lives. In India, the average life expectancy of a person aged 60 is 17.5* years. This means that an average Indian lives up to the age of 77.5. Hence, you need to start planning in advance to maintain your lifestyle and take care of other expenses for such a long duration.
Medical expenses: Retirement may also bring along medical emergencies because health deteriorates with age. A major worry with increasing age is unforeseen medical expenses. Rising at 15-17%^ every year, such medical costs can be difficult to manage unless you plan for them in advance. Apart from these expenses, you and your spouse will have your regular household expenses.
Financial independence post retirement: You would like to live your life on your own terms after your retirement. However, more than 65%* individuals above the age of 60 depend on others for their daily expenses. This shows how important it is to plan for your retirement and ensure your financial independence. For this, you will also need to choose a plan that makes the best use of your retirement corpus in such a way that your tax liability is kept at bay and it provides a regular stream of income so that you manage your expenses smoothly. Adequate retirement planning will help you to meet unexpected expenses without a worry.
Who should you invest in retirement plans?
- You want to secure a financially independent life for your spouse in your absence
- You wish to have a fund to cover high health care costs in future
- You would like to maintain your lifestyle even post retirement
Benefits of Retirement Plans
Thanks to improvements in healthcare and access to healthcare facilities, Indian are living longer and living higher quality retired lives. For you to lead a comfortable and financially secure retired life, you need to save enough. Remember in retirement, inflation will still be at work and as you advance in retirement the regular income will buy less and less, when compared to the past. Retirement plans in India help you save enough for retirement. Here are some compelling reasons to buy a retirement plan.
Never run out of money retirement
Through disciplined and regular investments in an pension plan, you can ensure that you have enough retirement savings and you don't have to compromise on the standard of living in your retired life.
Guaranteed regular income for life
With Retirement plans, you and your spouse can receive regular pension for life.
Security for your children in your absence
In some retirement plans, your children will receive a lump-sum amount in the absence of both you and your spouse. This helps you leave behind a legacy for your children.
Choose your payouts
You can choose how you wish to receive the annuity payments, either as a lump sum or installments.
Helps accumulate substantial savings with small investments
Pension plans have long investment terms. If you start early in your work life, you can regularly invest small amounts over a long period of time and accumulate adequate retirement savings. Then, you never have to compromise on your present needs. You also don't need to do anything different or take additional risk to have large retirement savings.
Creation of regular retirement income
There are many who might be good at regularly investing and saving enough for retirement but they may not be adept in reinvesting retirement savings for regular income. Retirement plans or pension plans rid you of this bother and ensure that the absence of salary never pinches you.
Income security for spouse and family
You protect your family with a life insurance cover during your work life so that the regular needs and major future needs are secured in case of the unfortunate event. Retirement plans, on the other hand, help secure retirement income for your spouse and family members when you choose the relevant annuity.
Inadequate provident fund savings
Given the ever increasing span of retired lives of Indians, mandatory retirement savings like provident fund and gratuity, will prove to be inadequate. Also, given the fact that Indians keep withdrawing money from their provident fund during important occasions like marriage in the family, it becomes even more important to bolster retirement savings. Retirement plans fulfil this need very well.
Option in investment
Certain retirement plans give you the option to invest in government securities, debt and equities depending on your risk profile.
Apart from enjoying a comfortable retirement, you can also enjoy tax benefits on the premium paid up to a limit of 1.5 lakh under Section 80CCC of the Income-tax Act, 1961. In addition, at the time of maturity, the pay-outs you will receive are also completely tax-free under Section 10(10A) of the Income-tax Act, 1961 subject to the terms and conditions stated therein.
Avoiding financial stress on children
Even as family structures change in India and family sizes get smaller, the possibility of children supporting parents in old age keeps diminishing. If you run out of money in retirement and you children do come to your financial assistance, you might see their finances being stressed. Also, their journey to their major financial goals such as children's higher education and retirement will get compromised. A retirement plan will help you maintain your financial independence even in retirement.
Why should I start planning for my retirement now?
You may be in your 30s and earning a good source of income but did you think about your life after retirement? Will you be financially independent without compromising on your lifestyle? Planning early for your retirement can help you gain more from your investment. While you are investing in a retirement plan, you can simultaneously save on taxes. Starting early will build a bigger corpus for you. You and your spouse would live an independent life and follow the dreams you both couldn’t achieve because of a busy schedule.
Power of Compounding: If you start saving early, your money will get more time to grow. For example, if you start investing `1.5 lakh p.a. at the age of 45, your retirement savings will be 41 lakh at a rate of 8% or 30 lakh at a rate of 4%, by the time you are 60 years. However, if you had started saving the same amount from the age of 40, your retirement savings at 60 would be 70 lakh at 8% interest rate and 45 lakh at 4% interest rate.
Increasing Inflation: After retirement, you will need regular income to meet your expenses. The later you start saving for your retirement, the more you will need to save. For example, if your monthly expenses are `35,000 at the age of 30, then by the age of 60, they will be 2.76 lakh## due to inflation. To meet these expenses, your retirement savings will need a monthly contribution of 25,000. However, if you delay your savings by just five years, this amount will increase to `48,500 per month.
Save 10% of your income for retirement: Given the power of compounding, even a small contribution can bloat into a big sum over the long term. Don’t underestimate the significance of the savings in the first few years. Assuming that a 25-year-old investor puts away a fixed amount every month, his savings in the first five years will account for 44% of his total corpus when he is 60 years old. The later you start, the more you will need to save. If you have started late, say in your 40s or 50s, you will have to invest up to 20-25 % of your income if you want a comfortable retirement. The 10% rule is crucial for self-employed professionals and others who are not covered by the EPF umbrella. They can opt for mutual funds, choosing the ones that suit their risk appetite and age profile. However, you need to have the discipline to put away the given sum on a regular basis, which will be done in the best way by Retirements Plan.
Create a rainy-day fund: Those who don’t have at least six months worth of basic living expenses in a liquid account-think savings account or money-market mutual fund-should make that their first priority. This money will help in the event of an emergency like a job loss or health crisis. But it can also cover unexpected expenses like car or roof repairs.
Put savings on autopilot: You shouldn’t wait until your debt is completely erased to begin saving for retirement. You’ll want to eventually be saving at least 10% of your income, but you can get there over time.
Increase investment as your income grows: According to the survey, companies in India gave an average pay hike of 9.3% during 2017. By how much did your income go up? More importantly , did you step up the quantum of your investments accordingly? Not many people do that. Sure, inflation has been on the rise and most of this year’s increment would have been nullified by the increase in the cost of living. But even when there is a marked increase in the investible surplus, people don’t match their investments with the increase in income.
Save 20 times your annual expenses: This rule is different from others because it is based on how much you spend, not on how much your investments earn. Knowing your post-retirement expenses is crucial to retirement planning. Some expenses, such as those on clothing and entertainment, come down. Others, such as transportation, medicine and insurance, go up. Add up all the expenses you are likely to incur after retirement to know how much you will need per month. Then, multiply this amount by 240 to know how much should be your retirement corpus.
However, this calculation is based on a number of assumptions. Firstly, you should not have outstanding loans when you hang up your boots. Secondly, you and your spouse should have sufficient health insurance. A survey conducted by HSBC earlier this year shows that unforeseen expenses and medical costs are the biggest concerns for Indians during retirement.
The good news is that Indians are increasingly becoming aware of the need to plan their retirement. In a 2010 survey by Bharti Axe Life Insurance in eight top cities in the country, 74% of the respondents said that they knew how much they would need after retirement . Three years earlier, only 53% had a fix on how much they would require in their sunset years.