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Benefits of Retirement Planning

In this episode of Dhan ki Baat, Apoorva Tiwari, Chief Operating Officer at IIFL Holdings, discusses how to plan for expenses after your retirement.

2118 views  23 Jan 2018

Benefits of Retirement Planning

Retirement planning is one of the most crucial aspects of sound financial planning. Planning for retirement should begin early and you must set aside funds and invest regularly to build a corpus to ensure a comfortable retired life. For this, you should invest in policies and schemes that lead to saving more for retirement. The more money you save, the better it is as this would cover all of your future expenses, especially when you won't have a regular source of income.

Stages of retirement planning

1. Accumulation: The stage where you can accumulate or save as much money as you can for your future years. The accumulation stage comprises of:

  • Your early education years
  • Early career phase
  • Your marriage
  • The years of raising your children
  • Till your children move out

A person who has successfully saved money through all these phases is more likely to achieve his/her financial goals.

2. Allocation: Simply saving a part of your income isn’t enough. You need to invest your hard earned money in high return assets to ensure that you have enough for the future, especially since prices in the coming years will surely be higher. Hence, you must ensure that your investments give you a good return. Further, you may consider investing in assets that will give you high returns, while the remaining money can be invested in slightly risky instruments, in order to open the high risk-high return possibility.

3. Distribution: By the time you reach this stage, you have retired and are collecting money from the channels you set up during the accumulation phase. The success of the distribution stage depends on how well you managed the accumulation stage.

How to plan for future expenses?

Understand expenses: Take a thorough look at your current spendings and identify the expenses necessary for the normal functionig of your house. You should also figure out other expenses that can be avoided or cut down (discretionary expenses). Apart from these, determine roughly how much you will need to cover all your future medical expenses so that you can start saving accordingly.

Estimate retirement corpus: One of the main reasons why retirement plans fail is because people underestimate the value of inflation at the time of determining the retirement corpus. Expenses equaling Rs50,000 today would become Rs2.8 lakh in 20 years from now. And if you are looking to save for retirement, it may take crores of rupees to live your life comfortably.

  • Identify investment avenues: Just saving and piling cash in your savings account won't let you save enough for retirement. You must identify different sources like equity mutual funds, National Pension Scheme, Public Provident Funds etc in which you can invest your savings to increase them by a substantial margin.
  • Start saving today: The early you start saving, the more money you will have post- retirement. It is never a good idea to postpone savings. It doesn’t matter how little you save in the beginning; it is imperative to start saving today.

Why is it essential to start early?

Look at the following graph will let you understand the importance of starting to save early:

Monthly Savings Rs. 7,271 Rs. 30,110 Rs. 1,34,660
Total Investment 30.5 lakhs 90.3 lakhs 2.4 crores

As seen above, if you start at the age of 25, with a of merely Rs7,271 per month and a total investment of just Rs30.5 lakh, you can achieve your retirement goal of Rs8.3cr. (The assumed rate of return is 15% per annum). But if you delay it, your monthly and totacontribution would have to be higher to give you the same corpus.

The best place to invest

Among the options available in the market, one of the better options where you can invest your money is the National Pension Scheme. It is a scheme backed by the Government for Indian citizens in the age group of 18-60 years. The minimum yearly contribution is Rs6,000, which you can pay in lump sum or installments of Rs500.

NPS offers investors multiple options on where the funds can be invested in - Equity (Class E), Corporate Bonds (Class C) and Government securities (Class G). The auto choice option lets you invest your money in all of the three asset classes in a pre-defined proportion. It automatically reduces the equity exposure as you get closer to your retirement. This helps generate higher returns in the earlier years while reducing volatility near the retirement age and is a recommended option for savers.

While there is no specific interest rate in NPS, when compared to other investment options,current returns have ranged from 10% to 14% depending on the amount of Equity chosen.

Age Class E Class C Class G
Up to 35 years 50% 30% 20%
40 years 40% 25% 35%
45 years 30% 20% 50%
50 years 20% 15% 65%
55 years and above 10% 10% 80%

Taxation on Withdrawal

If you invest in the National Pension Scheme, having a total corpus of Rs8.3cr, you are provided with mandatory annuity of 40%. The tax-free lump sum is 40%, and the taxable lump sum is 20%. It is recommended that you take a lump sum of Rs3.2cr, which will let you get a monthly income of Rs2.28lakh. Avoid the taxable lump sum as far as possible, and use it only if there is an emergency.