Why retirement planning?

In today’s fast pace life everyone is busy working hard to earn a living for their family. With an enhanced lifestyle everyone wishes to own a flat, and live a secured and peaceful life ever after. But little do they realize that they need to plan for their future retirement. About two decades ago everyone was happy earning 3 to 10k each month and investing a part of it for their retirement days. They always thought that their PF contribution will be able to suffice them post retirement. Things have gone worse since them. They were not able to judge the rate of inflation in consumer goods and till date feel that they could have invested more in their salaried age.

Present scenario is a little different. Everyone wants to lead an enhanced lifestyle and is not happy with the basic food, clothing and shelter. They require an air conditioned car, an LCD television, a centralized ac flat and so on. Wants keep on increasing with increased salaries, residential complexes, Iphones and shopping malls.

So what is it that one should realize. It is of utmost importance to know what you should be saving year on year to build an appropriate retirement corpus. One needs to take advice from a financial planner to ascertain the actual retirement corpus required and a proper asset allocation to achieve this amount on time. A retirement corpus can be built by a disciplined investment approach in varied investment avenues of equity and debt. Following are the reasons important for building up a retirement corpus:-

Fulfill other goals: Every individual goes through various life stages. A married couple has goals to own a house & a car, education and marriage of their children and so on. People tend to forget that they have to retire some day and live on their own, when there would be very minimal or no income flow at all. People work hard and save harder for their children and ignore building a corpus for their retirement.
Inflation: A minimum bus ticket that used to cost me 25 paise 15 years ago is costing Rs. 3 now. An increase of 18% p.a Did you realize that? Similarly there has been an increase in all commodity prices. We can’t imagine what would be the cost of these commodities post our retirement. Hence our expenses would increase making it difficult for us to provide for monthly expenses post retirement.
Increase in life expectancy: Not only inflation but due to advancement of science and technology the life expectancy of an individual is increasing year on year basis. This comes with additional pressure to provide a regular income for years after retirement.
Nuclear families: People have started living in nuclear families. They do not wish to stay with their parents, instead prefer a house with wife and kids. Hence, overall burden of the house rests on parent’s shoulders, even when they do not earn any income.
Medical expenses: As age progresses, expenses borne toward maintaining a healthy life increases. There are huge expenses to be borne on account of medical emergencies and towards the cost of regular medicines. Even mediclaim insurance reduces or provides no cover as age progresses. People have to create sufficient emergency fund to cater to these expenses.

A word of advice: Do not forget that you need to accumulate wealth for your life post retirement. Your PF contribution alone won’t suffice. Start early to plan for retirement, follow a disciplined and systematic approach towards investing and invest in a proper asset allocation to gain maximum returns.

Pension plans

Aegon Religare’s new aggressive ad campaign about their pension plans have become quite a success. The advertisement itself shows that we need to plan for our retirement as soon as we can. The example of a Rs. 50 bus ticket reminds me of the days when I used to travel by bus with a minimum ticket of 0.25 paise. Today the same is costing Rs. 3. Hence there has been an increase of 13% p.a in bus ticket prices. Every item on your grocery list, real estate, medicines and consumer durables have become expensive and inflation will keep on rising. One has to create a huge corpus to survive post retirement. One of the options is to invest in pension plans. A pension is an income post retirement throughout your life. For creating an income post retirement you have to start saving into a pension scheme, as early as possible and as frequently as possible. It is similar to the Provident fund scheme that every company provides, on which an individual earns an income post retirement throughout his life. Almost all insurance companies in India provide pension plans which have a few distinct features:-

1. One can invest a fixed amount monthly, quarterly, semi-annually or annually.
2. Amount saved in a pension plan is invested at the applicable Net Asset Value (N.A.V) and denoted in units.
3. Every month a certain amount goes towards charges like the fund management charge or premium allocation charge and so on.
4. You can also opt for an insurance cover on your pension policy. The cover provided is generally 5 to 10 times of annual premium.
5. The investor has to choose from a range of sub-options or plans provided by the pension plan. For example a risk averse person can opt for a Protector type fund where 90 to 100 % of the investment is made in Gilts and Treasury bills which are risk free. Similarly an investor with a greater risk appetite can invest in Aggressive fund where 60 to 100% will be invested in equity and equity related instruments.
6. One has to define their retirement or the vesting age when they wish to stop investing and start receiving a regular income. The vesting age can be anywhere between 45 to 75 years as per policy terms.
7. A reversionary bonus is declared annually and a terminal bonus is paid out at the vesting age from the With profits fund. Even this differs from company to company.
8. You can opt for a single premium or regular premium pension plan.
9. In case of death of the investor during the term the company pays out the fund value + bonuses (if applicable) or the Sum Assured (cover) or both. This too differs from policy to policy.
10. At the vesting age the investor can opt for an annuity plan from the same or a different pension provider.
11. Tax benefit u/s 80C upto Rs. 1 lakh p.a. On retirement one take withdraw a lump sum of 33.33% of the fund value tax free as on the vesting date.
12. One can surrender the policy after three years of policy existence and can redeem the fund value as on that date.
13. Pension received post retirement is treated as an annuity and is taxable as income under the head of salaries.

Tax laws keep on changing from time to time. Different pension plans have different features. It is always advisable to read the prospectus. Also one needs to consult a financial planner to ascertain the fund required at the time of retirement and then follow a disciplined investment approach to build this fund.

Investment options for retirement

If you have understood by now, the importance of generating a retirement corpus here are the few options that where you can look at investing your hard earned money.Equity: If you have more than 15 years to go for retirement, look at investing in equity shares as this could give you the best returns.
Fixed deposits: Safe and secure, but does not provide great returns. Good for risk averse people.
Insurance: Should be purely used to cover risk, and should not be used as an investment tool. If you are adequately insured and have additional corpus, can invest in ULIP’s with a long term view. Provident Fund: Employer and employees contribution towards this fund generates a good corpus. Best option for government employees as returns are non-taxable for them.
Public Provident Fund: Best feature is the lock-in period of 15 years with the power of compounding.
Mutual funds: If you do not have knowledge about equities, consider this option. Expertise of the fund manager help you maximize your returns.Property: Appreciating asset in the long run. Expensive options to invest in prime cities. Not for all.
So what do you prefer?