Retirement Plans

A comprehensive retirement planning can help you stave off the worries of inflation and living costs during your golden years. Key to a fulfilling retired life is to plan early and use the best pension plans possible to achieve your goal.

What is Retirement Planning

Retirement planning is the process of deciding the goals to pursue after retirement and the roadmap to achieve those goals. You no longer receive a paycheck once you retire and thus have to rethink a few things. You have to do assess where will the income come from, how you will meet your expenses etc., how much are your savings etc. All these things make up the term retirement planning.

Though no time is perfect, you should start planning for retirement as early as you can. The earlier you start planning for your finances the better it will be for you once you reach the retirement stage.

How Do Pension Plans Work?

Investing in a pension plan requires you to contribute a certain sum to a fund over some time. This can be done either regularly or in a lump sum. These payments which you invest in your pension plan help build your corpus through the years. This corpus is used to provide you regular payments that you can use to meet your expenses once you retire. Thus, a pension scheme makes sure that your income flow does not stop even after retirement.

Immediate Annuity

An annuity is payable immediately, as per payment frequency chosen, at a constant rate in arrears. Premium is paid in lumpsum at beginning of annuity plan.

These are pension plans more than investment plan for retirement. These plans are best used near or after retirement, once you have accumulated your retirement funds.

Deferred Annuity

An annuity is payable post Deferment Period, as per payment frequency chosen, at a constant rate in arrears. Premium is paid in lumpsum at beginning of annuity plan.

You can invest in multiple such plans to start your pension at or after retirement. Your investment continues to grow while you wait for the annuity to start in the deferment period.

With Cover Pension

This pension plan includes insurance coverage that entitles your dependents to a lump sum in case of an unfortunate event. Such plans are best for you if your spouse is financially dependent and is younger than you.

With Cover Pension

This plan pays out the corpus built to date to the nominees in case of an unfortunate event. There is no life cover (sum assured) in these plans. Due to the lack of life cover benefit, this plan will only transfer the remaining corpus to your nominees upon your death. 

Unit-linked Pension Plan

Your premiums are invested in a combination of stocks, bonds, & securities depending on your risk appetite, to build a corpus that is paid out at maturity.

These plans are great for long-term corpus growth. So, if your risk appetite and age allows for equity exposure use Unit-Linked pension plans to build your retirement funds faster.

Your retirement goal will differ from others depending on several factors involving your lifestyle and income during your employment years. Another factor which you should account for in your retirement goal is inflation.

The factor which makes inflation a strong factor to consider in your retirement goal is that it will affect your life during the later years. As you progress in your retired life, your chances of earning from employment reduce and so do your chance of correcting the investment mistakes.

Thus, the earlier you factor in inflation in your retirement goal the better. Other factors which will define your retirement goal are:

Factors	Impact
Your expected retirement age	A higher retirement age gives you more time to invest and grow your corpus. However, early retirement will give you less time to accumulate sufficient money. Also, you will need more money to sustain your extended post-retirement life.
Life-expectancy	A higher-life expectancy extends your retired period. Thus, you will need a bigger corpus to sustain your living costs. Also, inflation will have a bigger impact.
Health condition	Health condition and lifestyle affect your medical expenses at a later age or in post-retirement life. Poor health and unhealthy habits may increase your medical expenses post-retirement.
Current income	Current income affects your lifestyle and overall living costs also, it defines the amount you can save now for your retirement goal.
Current age	The current age is the factor which will define how much time you have until retirement, and how much of your today’s income should be your retirement goal.

Retirement goal planning is a simple process. Retirement consists of two distinct financial phases – accumulation and distribution. The accumulation phase is when you are earning from employment and building your retirement pool.

In the distribution phase, you use the accumulated funds to replace your income from employment.

If you are 30 years of age and earning Rs. 10 lakhs per year, at the age of 60, your first year’s monthly income will look as given below:
 

Disclaimer: Rate of return for the retirement funds has been assumed at 8% p.a.

This is assuming your annual income grows by 5% every year during your employment years. You will also withdraw your pension at a growing rate of 5% per year to account for inflation, until the age of 90.

You can also, look at these amounts as, “you can contribute a higher percentage of your annual income towards retirement to retire earlier.”

So, for the accumulation phase, your retirement goal may not account for your actual expenses, but only your rate of contribution.

The answer depends on your current age, expected retirement age and your contributions so far. Simply put, you can follow the chart below to decide ideal contribution for your financially healthy retirement:

Saving an adequate amount is essential to your happiness after retirement. But what is that adequate amount? The answer to this question depends on your current age as well as the contributions you have made so far. The retirement age is generally 60. So, if you decide to start contributing when you have 30 years left to retire, that is you are 30 then putting aside 10-12% of your annual income will be good enough.

But as you grow older and don’t invest, your contribution will increase. If you now have only 20 years to retire, then the amount you have to contribute each year will increase to 20% of your salary.

This cycle goes due to the compounding returns. This is why you are advised to start investing early.
 

Assuming an ROI of 8% p.a. on retirement investments and the expected retirement age of 60

The less time you have, the higher your contribution has to be towards retirement. That is unless you already have a pool of funds available.

People often delay planning for their retirement, owing to a false sense of having abundant time. However, the earlier you start retirement planning, the better!
Here are a few reasons you need to start planning right away

1.Cheaper when younger

Retirement plans offer dual benefits of insurance and investment. When you are young the body is less prone to diseases which reduces the risk for the insurer. Since insurance is a business of risk assessment, the premiums are lower for young policy buyers.

2.Compounding

When you leave an investment to accumulate for a long time, the interest earned on the original investment too starts to generate returns. This leads to rapid accumulation and the corpus grows exponentially. When you start investing early, compounding helps in multiplying the investment rapidly.

3.Course correction

All market-linked investments are inevitably risky. When you start investing early you have ample time to monitor the performance of the investment and make necessary portfolio adjustment. Canara HSBC Invest 4G plan allows investors to switch between funds without any extra cost.

Retirement planning is not a task of a few weeks, or even months. A satisfying and fulfilling life post-retirement requires several years of planning and implementation. Depending on your age, retirement planning can be divided into three stages.

1.Accumulation

In the first stage of retirement planning, you have to contribute regularly to the pension plan. The premiums have to be carved out from your monthly income. The corpus available at your disposal after retirement will depend solely on the number of contributions made to a pension plan during the accumulation phase.

2.Preservation phase

Your expenses will change dramatically with age. The change in lifestyle fuels an increase in expenses as one nears retirement. The preservation phase kicks in 10-15 years prior to retirement. In the preservation stage, you can make a better analysis of your post-retirement requirements. Taking the required fund in an account, conduct a thorough review of existing investments.

3.Distribution Phase

The distribution phase starts when your regular income stops. This is the final phase of retirement planning when the fruits of the decades-long labour ripen. In this phase, you begin receiving monthly income from the pension plan to support your post-retirement expenses.

Retire Richer

The more time you can give your money to grow, the better corpus you will have at retirement. Since you cannot move your retirement date too much, it’s better to start investing as soon as possible. Give maximum time to your money for maximum compounding to take effect.

Save More Tax

Investments to retirement plans and life insurance pension plans help you save tax every year under section 80C. With new regulations in place limiting the amount of investment to individual retirement plans to Rs. 2.5 lakhs, starting early is even more important. You can still build a formidable corpus without exceeding your tax-exemption limits.

Avoid Last Moment Rush

Correcting the gaps in your retirement corpus becomes difficult as you progress. If you avoid investing adequately in your retirement early on, you are likely to encounter gaps in your retirement fund goal. This gap will be difficult to fill when you are close to retiring, due to insufficient time. You can avoid this by starting now.

Offer Better Growth to Your Investments

All market-linked investments are inevitably risky. When you start investing early you have ample time to monitor the performance of the investment and make necessary portfolio adjustment. Canara HSBC Life Insurance Invest 4G plan allows investors to switch between funds without any extra cost.

Cheaper When Younger

Retirement plans offer dual benefits of insurance and investment. When you are young the body is less prone to diseases, which reduces the risk for the insurer. Since insurance is a business of risk assessment, the premiums are lower for young policy buyers.

Counter Inflation Shock Post-Retirement

Investing early on keeps your retirement fund pool account for the inflation and your income growth more efficiently. This in turn adds to the growth rate of your retirement portfolio, leading you to have sufficient funds at the time of retirement. You can start your pension without having to compromise on your lifestyle.

• Start early:

  The earlier you start investing in ULIPs, the better as it gives ample time to the investment to multiply. As soon as you start working, start putting aside small amounts for retirement. Keep on increasing the contributions with the increase in income.

• Equity option:

  Even though equities are volatile when compared to other asset classes, they generate relatively better returns. Studies have proved that equities tend to outperform other assets in the long run. Retirement plans being long-term investment products, even a small exposure to equity markets has the potential to generate significant returns. With Invest 4G ULIP, you can choose to have equity exposure ranging between 0% and 100%.

• Option to diversify:

  When you are saving for something as important as retirement, it would be foolish to have disproportionately high exposure to a particular asset class. Equities generate decent returns but are also risky. Choose a plan that allows you to have exposure across asset classes. You can choose to invest in a single fund or a combination of funds through Invest 4G plan.

• Vesting age:

  Choose a retirement plan with a vesting age that matches your requirements. If you plan to retire early, there are plans with vesting age starting at 40 years. On the other hand, there are plans with a vesting age of 85 years.

Investment Portfolio

There are many types of pension plans available in India. If you are starting early enough, you should look at the asset options offered by the plan to maximise your return within the time available to you.

Options to Invest in Equity Funds

Saving Plans like Invest 4G let you choose the type of asset you want to invest your savings into. However, if you want, you can choose a pension plan with automatic allocation to equity funds. This allocation will diminish as you near the retirement age.

Portfolio Management Options

Those pension or retirement schemes which offer equity exposure to your retirement savings should give you the option to manage the portfolio automatically. So that your money doesn’t miss the market opportunities while you are busy working.

Maximum Maturity Age

Maximum maturity age limits your ability to keep the funds at one place for a long time. You should not have to make investment choices regularly, especially close to or after your retirement.

Bonus Additions

The best retirement and pension plans provide bonus additions to the investors sticking with the plan longer. These boosters help your retirement portfolio growth, especially when you are investing only in safe portfolios. Pension plans will generally offer loyalty additions and wealth booster bonuses.

Pension Plan Expenses

There are several expenses related to ULIPs such as fund management charges. Choose a plan that has lower administrative charges as the expenses are generally deducted from your investment. The lower will be the expenses; the higher will be the fund value.

Annuity Option

An annuity option ensures that your corpus lasts till you live. It is important to choose a plan that has an annuity option best suited for you. There are pension plans which guarantee annuity for a certain number of years regardless of whether the policyholder survives or not.

Retirement is the simplest goal to plan for if you follow the correct approach. Investing for a prosperous retirement is the only challenge with this goal. So, here’s how you can go about it to keep it simple and rewarding:

Step 1: Start By Saving At Least 10% of Your Income

Remember your pension income and success of retiring at your desired age depends on how much of your present income you save for your retirement goal. If you have 30 years to spare the best you can do under Indian economic conditions is to invest at least 10% of your take-home income towards retirement goal.

This should be a safe investment in long-term pension or retirement plans.

Step 2: Start Investing Small Amounts to Equity Funds

Start Investing Small Amounts to Equity Funds

If you have more than 10 years before you retire, start investing small additional amounts in equity funds. Best way to allocate your money to equity is through unit-linked plans, as you not only get the tax benefits, but you can also manage your portfolio risk automatically.

You should aim to increase this contribution to at least 5% of your annual take-home income.

Step 3: Add Long-Term Assets to Your Portfolio

Add Long-Term Assets to Your Portfolio

Adding inflation-linked assets like house property for rental purposes and gold will help you continue to enjoy the inflation-adjusted income, even after retirement. Although such investments may be less liquid, they are useful in the post-retirement emergency such as low pension corpus.

Step 4: Minimise Post-Retirement Tax

Minimise Post-Retirement Tax

Monthly pension from a pension plan is taxable as salary income. Thus, you should add more retirement plans which allow tax-free partial withdrawals, such as unit-linked insurance plans. This will help you reduce your tax burden post-retirement.

Diversifying your savings to multiple assets is essential to achieve an important long-term goal such as retirement.

Know More

Vesting age

Choose a retirement plan with a vesting age that matches your requirements. If you plan to retire early, there are plans with vesting age starting at 40 years. On the other hand, there are plans with a vesting age of 85 years.

Equity option

Even though equities are volatile when compared to other asset classes, they can generate relatively better returns over the long-term. Studies have proved that equities tend to outperform other assets in the long run. Retirement plans being long-term investments have the potential to generate significant returns even with a small allocation to equity funds. With Invest 4G, you can choose to have equity exposure ranging between 0% and 100%.

Option to diversify

When you are saving for something as important as retirement, it would be foolish to have disproportionately high exposure to a particular asset class. Equities generate decent returns but are also risky. Choose a plan that allows you to have exposure across asset classes. You can choose to invest in a single fund or a combination of funds through Invest 4G.

Option for Additional
Bonuses

Bonus units or funds added to your long-term portfolio can propel your portfolio to grow faster. The best pension plans offer loyalty additions and wealth booster benefits to investors investing in a plan for more than 5 to 10 years. The longer you invest the better your benefits become.

Option for Automatic Portfolio Management

If you are investing in portfolios with elements of equity, you need automated portfolio management to check the risk on your behalf. This will allow you to benefit from market movement safely even when you are not paying attention to the investment.

Policy Surrender Charges & Valuation

Pension and retirement plans are investment policies with good cash values close to their vesting or maturity age. Also, often you need lump sum money close to retirement for paying-off any expensive debt or buying a necessary asset like a house.

Lower surrender charges will help you recover the maximum amount from the investment in emergencies. Although, you do not need to surrender the policy as you can borrow against it at much lower rates. But the borrowing value is directly related to the surrender value.