Retirement planning is not a very popular activity with many Indians. In India, unlike the other developed countries, we do not have a surety to receive pension once we retire from active work. Hence, even the awareness on pension is very low in India.
In countries like US, UK, Japan, Australia, Netherlands and Canada they have proper social security systems in place for the residents who pay a monthly pension post retirement. The retirement age for most of these countries is 65 years. The amounts required for pension funds are calculated basis the retirement age and life expectancy. As the life expectancy increases across the globe the pension systems will now have to pay two to three times longer than what they were designed for. In some countries the life expectancy has risen by as high as 11 to 16 years. This has given rise to pension crisis since there is a gap between what is needed during retirement and what is available.
In the case of women, the problem is way larger. Owing to larger life expectancy and lower retirement balances as a result of lower wages, they face a higher gap in pension funds.
This gap is only increasing by the day with demographics changing rapidly and lower working population available to support the ageing ones.
India by large does not have any strong social security systems, and hence we need to plan our retirement ourselves. The only persons with a fixed pension income are the old government employees. All those who have joined government jobs on or after 1st January 2004 have to compulsorily contribute to NPS scheme. When it comes to those working in private sector, they need to plan sooner rather than later to secure their silver years and lead a financially independent life. The only option for them is to invest wisely when they are earning so that they have a good retirement corpus.
To effectively plan your retirement, we need to start early. We need to bear in mind however that the money that we save is going to be used post-retirement i.e. after almost 20-30 years. This means we must bear inflation in mind. Hence whatever we save today will be worth much lesser in future. The savings will have to be calculated accordingly. Once we have figured minimum annual fund required post retirement, we have to calculate the figure of the corpus that will earn desired annual income. It further means that we will have to start saving to accumulate this corpus over our working life in order to secure our post retirement life. .
Funds for your retirement can come from many sources like rental income if you have a second home that is given on rent, income from investments like PF, PPF, pension plans, mutual funds, insurance policies etc.
Some quick tips for planning your retirement corpus are
- Start early – You need to preferably start at a young age so that you get ample time to accumulate high savings. Age of 25 – 30 years should be a good age to start the savings. At this age we can take high risks and invest in investment plans that have a high return expectation. As the age increases, we need to be risk averse and invest more in risk free debt instruments, PPF and the like.
- Carefully calculate the retirement corpus – When you are planning for your retirement consider all the factors that are necessary to arrive at a monthly income you will need post-retirement. You must give importance to medical expenses since this expense is high in old age. It should also include lifestyle expenses and other essentials.
- Best investments for retirement
- Insurance and ULIP plans – Term insurance and medical insurance are of utmost importance. Term plans take care of your expenses post your death for the family and medical insurance funds all your medical expenses. Medical expenses are generally on the higher side post retirement. Many mix insurance and investment by investing in ULIPs or endowment. But these did not serve either of the purpose well. Investors feel that ULIPS and endowment plans will reap them high returns over longer term helping to accumulate good retirement corpus, whereas in reality they don’t. Therefore, for your insurance needs, you should ideally go for a term insurance and to earn better returns you can choose any of the following investments.
- PF – Provident Fund is the most popular and compulsory investment that is made by salaried employees. 12% of minimum contribution is made by employer and employee every month for all the years of service. This is available post retirement and gives a good rate of return on investment. Many people make the mistake of withdrawing this amount when they either switch jobs or on completion of 5 years. You should avoid such withdrawals since it reduces your chances of growing the retirement corpus. One should also make sure that they transfer their account when they switch jobs.
- Rental Property – If you own any property which is fetching you rental income then it may continue to grow with time and take care of future inflation. It will continue to be part of your income post retirement. So it will take care of some of your expenses after retirement. If you think that you need some more income, you can choose any of the options mentioned below to boost your funds.
- PPF – whosoever does not have an option of PF in their companies can opt for this. Even when you have PF you can still invest in PPF as an additional investment. It is tax saving as well as earns a good amount on investment with compounded rate of interest. The current rate of interest as revised in July 2017 is 7.8%.
- NPS – the national pension scheme launched by the government is also a very good option to create a retirement corpus. It acts just like a pension plan where your money is invested in the markets and earns you a high return. Although the money stays locked until you reach 60 years of age, it serves the purpose since the investment is with an intention to create funds for retirement. The ROI on NPS is 12-14%. You can withdraw 60% of the amount on retirement and 40% is compulsorily converted into annuity, that pays you a monthly pension. 60% amount received on maturity is tax-free.
- Mutual funds – Investment in mutual funds is a good option to grow your retirement funds quickly. They provide you an opportunity to invest in high return equities and low-risk
- Apart from these there are some more savings options like Senior Citizens Post Office MIS, FDs and RD accounts that can serve the purpose and fetch you some good returns and regular income in retirement years. However, one must note that the returns in all these options will be taxed. The returns on these schemes may range from 7% to 8.5%.
These are some of tips for you to make sure you have a smooth retired life free of financial worries.