The process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program and managing assets. Future cash flows are estimated to determine if the retirement income goal will be achieved.
Importance of Retirement Planning
There are many reasons why planning for retirement is important like any other goals:
Increase in life expectancy: Our generation will live longer than previous ones due to improved medical and healthcare, implying the need to gather enough funds that can sustain longer life. This also implies that the healthcare needs and expenses are likely to haunt us.
Shortfall in Employer Funded Pension/Pension Funds : The employer or government funded pension schemes are less likely to sustain the income needs post retirement. The pension that one may receive from these schemes will not be sufficient to maintain the lifestyle. This is the reason many individuals worldwide supplement their state or employer funded retirement plans with self-funding- i.e. pension plans.
Change of social structures: In spite of family support, many retirees don’t prefer depending on the relatives or children for meeting post retirement expenses. Maintaining independent lifestyle is sustainable only when backed with a financial cushion.
Lack of social security system: There is no social security system in our country. Hence one has to plan to build the entire corpus to help meet the regular income or any contingency post retirement.
Desire to remain contributor: The want to contribute to the family by providing and supporting the kids or grand kids at milestones of their life remains even after retirement is inevitable. Starting an independent venture is also an emerging trend. These can be fulfilled only when one is financially self-reliant.
Rest and relaxation: After fulfilling all your responsibilities, you may want to build a retirement corpus to go on holidays, to pursue a hobby etc.
Best Financial Products to help you plan your retirement
Retirement has two phases – Accumulation and Distribution. Accumulation phase is the period where you accumulate the amount required for your needs post retirement. Distribution phase is where the accumulated corpus is distributed well to suffice the post retirement needs. Let us look into financial products for investment pre-retirement and post retirement.
Pre-Retirement Investment Products
1) NPS: New Pension Scheme or NPS is a retirement product open to all individuals across the country. This scheme is mandatory for government employees. The fact that fund managers of NPS scheme can also take exposure to equity and equity related instruments is also a positive for the scheme in the long run.
NPS also provides tax benefit in the form of deduction under section 80C. Remember that it is mandatory to purchase annuity worth 40% of the corpus accumulated through NPS at the time of retirement.
2) EPF: Employee’s Provident Fund or EPF is the most popular retirement saving instrument in India. Though it was introduced as a retirement product, not many see it so. The current rate of return from EPF is fixed at 8.8% p.a. EPF offers deduction up to 1.5 lakh limit under section 80C; interest from EPF is tax free and withdrawal is also tax free if there is continuous service of 5 years.
Unlike NPS, EPF does not have any restrictions such as purchasing annuity. However, it is advisable to stay invested in this scheme by opting for EPF transfer whenever there is change of job. This would ensure that you reap the benefits of guaranteed returns along with power of compounding.
3) Equities: No matter how many financial instruments you pick, none of them can match the returns provided by equity related instruments such as Stocks and Mutual Funds. While investing in these instruments, make sure that you pick products for the long term i.e at least 10 years or more and your emotions are under control in this period.
This doesn’t mean you have to stick to the product evening though it is not performing well. Review the products every year or switch to better products only is something has gone wrong fundamentally. Mutual funds also give you an option of monthly SIP, where you can invest in a disciplined manner for your retirement. Equity related products are also tax free after 1 year of investment.
4) ETF: Exchange traded funds, popularly known as ETF’s are also a good option for accumulating corpus for retirement. In India, ETF can be done through Index or Gold. Index ETF tracks the index and Gold ETF invests in Gold. You can purchase units of ETF by purchasing Gold units every month. You would thus benefit from cost averaging rather than investing in bulk and entail the risk of timing the markets.
5) Bonds: Bond is a type of loan taken from you by a company or government and giving you some interest for the loan. You must have heard of bonds these days such as IRCTC Tax Free Bonds, HUDCO Tax Free bonds etc. Many of these bonds are for 10 and 15 year durations. Do check the ratings of these bonds before investing in them.
Post-Retirement Investment Products
1) Monthly Income Schemes: Post retirement, you would require schemes which provide regular income for you. Such schemes are popularly known as Monthly Income Schemes (MIS). Various mutual funds provide these in the form of funds. Post office also provides MIS.
You usually invest a lump sum and the corpus is invested in various instruments to provide you monthly income. Post office offers interest rate of 7.8% p.a payable monthly and the maturity period would be 5 years.
2) SCSS: Senior citizens saving scheme (SCSS) is just the kind of retirement product you would need post retirement. This is the safest investment option for senior citizens. You can gain an interest of 8.6% p.a with a maturity period of 5 years. The account can be opened in post office or any nationalized banks.
3) Pension Plans: Pension plans are provided by insurance companies as well as mutual funds. They would invest a lump sum amount and provide you monthly income just as in the case of SCSS or MIS.
4) Debt Funds and FD’s: The investment options given above do not give you proper liquidity. As senior citizens, you might need to put some amount aside as an emergency. To make sure that this amount also earns decent returns, you can opt for Debt Funds or Fixed Deposits of varying tenures. Debt funds are also tax efficient.
These are the retirement products available for investment in our country. Ideal time to start saving for retirement would be 1-2 years after you get your first job. If you have not started yet, it is time to start now.