Retirement Planning

“Retirement” – word dreaded by many and loved by very few. Post retirement is the time where the individuals having finished most of their responsibilities towards their family and loved ones, would like to spend the rest of their time peacefully with family and friends. Then why are so many people afraid of retirement? According to a survey conducted by the Transamerica Centre for Retirement Studies in 2016, top most reason is:

• Outliving their money (reported by 51% of survey respondents)

One of the primary reason for the above is the increase in longevity of individuals due to advancing medical care. This in turn works as a double-edged sword i.e., advanced medical care helps individuals live longer and at the same time, it’s not cheap. One needs to make sufficient provision to handle any medical emergencies during the post-retirement stage.

Coming back to the home turf, one of the studies conducted by HSBC  found that while 76% of the working age people in India expect a comfortable retired life, only 33% are actually investing to achieve this goal. Absence of realistic and strong social security in India makes it even more difficult for the individuals to sail through the retirement period.

Having highlighted the constraints which the individuals face, we would also like to take the opportunity to explain how to over these hurdles and lead a comfortable retirement life.

“Failing to plan, is planning to fail”

• When should you start planning about your retirement?

General response, which the individuals provide for the above question, they are too young to think about retirement and they will think about it when they reach late 30’s or early 40’s. By postponing their plan for retirement, they are denying themselves off the benefits of compounding*. Right time to start investing for retirement is “NOW”.

• Where should you start investing?
  • If your employer is giving you an option to invest the minimum amount or 12% of the Basic salary in the EPF account, do opt for contributing 12% option. This definitely helps you covering significant portion of your retirement requirements (provided you don’t withdraw it regularly during job switches) in addition to tax savings
  • Equities – Definitely an instrument that will provides returns over and above the inflation (provided you are a disciplined investor). If you are a new investor, please opt in for professional assistance via Mutual Fund while learning how to invest in Equity Market directly
  • Debt Securities – If investing in government securities, provides the safest and assured returns generally in par with retail inflation rate.

• What should be the Asset Allocation?

As a rule of thumb deduct your age from 100 and the residual should be the portion of investments, which should be allocation towards aggressive instruments. For Example., if your age is 25, then opt for 75% investment in aggressive instruments like Equities and 25% should be allocated towards debt instruments

• Different Products/schemes offered by Government, Banks and other organisations

As most of you are aware that government and private organisations are moving away from the defined benefit scheme (e.g., Pensions) to defined contribution schemes (EPF, EPS, NPS, etc.,), we will try to explore some of the retirement products available at our disposal before and after retirement

• National Pension Scheme (NPS) – Government sponsored pension scheme, which was launched in Jan 2004 for Government sector employees, but in 2009 the scope of this product is expanded for all. Allows the subscribers to contribute regularly towards the retirement goal and post retirement subscribers can withdraw part of the accumulated amount in lump sum and invest the rest in an annuity scheme.

• Employee Provident Fund (EPF) – Most widely subscribed savings scheme in India. While offering income tax benefits towards the contribution made by the employees, it offers the most safest way for accumulating wealth for achieving retirement goals. Unlike, NPS entire amount accumulated in EPF can be withdrawn upon retirement without making any investment in an annuity scheme.

• Employee’s Pension Scheme (EPS) – Social security scheme provided by Employee’s Provident Fund Organisation (EPFO), offering pension for the employees of the organised sector after their retirement at the age of 58 years. Minimum of 10 years contribution is required in order to avail this service.

• Senior Citizen Savings Scheme – Government guaranteed savings instrument available for Indian residents aged over 60 years. This offers the highest interest rate amongst the various small savings schemes in India. Initial maturity period for the same is 5 years, which can be extended for an additional 3 years.

• Reverse Mortgage – Product which provides regular monthly income, wherein an individual can pledge the house to the bank in exchange for a regular stream of income over a period of time

• Pension Plans – Different insurance companies offer annuity schemes, which serves as another vehicle for the retirement income.

Although various vehicles are available for achieving the retirement goal, many fail to achieve their retirement goal. If you need professional guidance in achieving your financial goals, please do reach out to a Certified Financial Planner (CFP) who will work with you in defining the goals, preparation, implementation and tracking of plans to help you in achieving your goals.

That’s all for today. Please do subscribe to our blog to get notifications on the new article. In case you have any questions or need assistance, please feel free to use the live chat option to speak with a Certified Financial Planner (CFP).

Raghu Kumar, CFP