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Retirement Planning

Added: 25/10/2017

Are we really prepared for our happy retirement ? In India everybody except Govt and public sector employees has to plan for their retirement. Retirement in most cases is the start of a dismal period of life for which most of us have not planned or are not fully prepared.

There is a sub-conscious perception that in the retirement period , the expenses will be lower than the working years because then the EMIs will end, child's education will be complete and there will be less travel involved. What most people do not realise is that due to inflation we will need a bigger amount of monthly income to maintain the same standard of living. Besides this the medical expenses is likely to be more in the retirement phase. With the increase in average life span of Indians , the requirement of funds for retirement planning also increases.

Types Of Pension Schemes :

Pensions received after retirement may be classified into mainly two types of plans : a) Defined Benefit Plan and b) Defined Contribution plan . Only Govt. And public sector employees are lucky enough to get the benefit of the Defined Benefit Plans . In case of Defined Benefit Plans , the amount of pension payable after retirement is decided by the employer and is not dependant on the amount of contribution made by the employee. The pension amount in case of Defined Benefit Plan also increases with the increase in inflation. However in case of Defined Contribution Plans , the pension amount is fully dependent on the total corpus accumulated from the contributions made by the pension receiver. In other words the proposed beneficiary in this case will have to make a regular or lumpsum contribution to his/her pension fund , which after accumulation of interest will form the total corpus on which pension will be payable. The amount of Pension/annuity payable will depend on the prevailing interest rate at the time of the commencement of pension payment.

Retirement Corpus :

Retirement corpus is the amount of money which a person needs to accumulate in his working life , so that he can maintain the same standard of living after retirement. Here comes an important question ... How much corpus/ funds is required by us at the time of Retirement ? Let us answer this question through an easy example . Suppose in the present times the purely personal expenses ( excluding family expenses ) of a middle aged person named Rajat , aged about 40 years , who works with an MNC is Rs 1,80,000/- per year. Personal expenses means the expenses incurred by Rajat for his personal needs like clothing, fooding , cosmetics, recreation etc. Now the expenses incurred by Rajat will increase every year due to inflation. Let us consider the average inflation at a very conservative rate of 5% every year. Hence if Rajat has to retire at the age of 60, his personal expenses will increase every year @ 5%. With the help of Financial Calculator , we find that the yearly personal expenses of Rajat after 20 years, considering yearly inflation @ 5% will be Rs4,77,594/- But we must not forget that the menace of inflation will not end even after Rajat retires. The personal expenses of Rajat after he retires at the age of 60 , will also continue to increase even after his retirement , due to inflation effect and medical expenses. Hence the personal expenses of Rajat even after his retirement also needs to be inflation adjusted. Assuming inflation adjusted returns ( Interest rate – inflation ) of 3% , Rajat will need a corpus of Rupees one crore fifty nine lakhs twenty thousand at the time of his retirement, to maintain the same standard of living. Here we have not considered the increase in lifestyle of Rajat with the passage of time although in practical case he will always try to better his lifestyle and standard of living . Rajat will also have to bear the expenses for his wife and other family members and in that case the requirement of funds will be higher.

It is quite obvious that like Rajat many of us are not prepared for our retirement has to immediately talk with qualified financial planners and start accumulating funds for retirement.

Regulators / Laws :

In India there are multiple regulators and laws having jurisdiction over retirement planning and also there is lack of consistency among the products. The various saving options for retirement and the Regulators are given in the following table :

Regulator / Laws Products
IRDAI Retirement Plans / Annuity Plans
PFRDA National Pension Scheme
SEBI Mutual Fund Retirement oriented plans
Provident Fund Act Employees Provident Fund
Gratuity Act Gratuity

Smart Saving Tips for Happy Retirement :

1) Start saving early :
If we start saving at an early age , our small savings can grow into a big corpus due to the power of compounding.

2) Save at least 10% of your income :
The minimum savings should not be less than 10% of our annual income to develop a good retirement corpus.

3) Invest a portion in equity :
As returns from other savings options are regularly decreasing, a portion of the savings should compulsorily be invested in equity , as per the risk profile and need of the individual.

4) Do not withdraw from provident funds savings :
Employees provident fund and Public Provident Fund gives tax-free returns on our savings . Hence we should avoid withdrawing from the said funds before retirement, unless it is extremely necessary.

5) Do not delaying health insurance cover :
An unexpected medical expenses can wipe out our hard earned savings. Hence we should take adequate health insurance for ourselves and our family.

6) Be Tax Compliant :
We should not underestimate our Tax obligations , as Tax compliance may become a huge burden , if not attended properly and in time.

7) Diversify your investments :
We should always diversify our investments for avoiding any unexpected risks. It is not advisable to keep all the eggs in one basket. If any component of our portfolio does not give the desired results then we can minimise the loss suffered through the good performance of our other investments.

8) Regularly review your investments :
We should regularly review our investments every six months and take corrective measures , if any of our investments are not performing well.

Hence we find that that retirement planning is a very important subject which needs our urgent attention and if necessary we should take the help of Certified Financial Planners , to successfully achieve our goals.


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