Retirement planning seems like a daunting exercise, and given the seriousness of the theme, it is. This leads to many individuals putting the task away for a later date. But it’s not going to be any easier to plan for retirement tomorrow than it is today. So let’s try to ease the process.
It’s always easier to work with a problem when we have a certain aim. In the case of retirement planning, this aim is the retirement corpus – the amount of money you wish to retire with. In order to arrive at the corpus, take a look at what you spend on an annual basis. You can assume that your expenses would remain the same taking into account inflation in the future. Though some large expenses like home loan may not remain part of expenses in the future, they may be replaced by increased healthcare costs. Once you know your annual expenses, a good rule of thumb is to multiply them by 25 to know the total requirement corpus.
For example, if your annual expenses turn out to be Rs 5,00,000 (a little less than Rs 42,000 per month), you’d require a retirement corpus of Rs 1.25 crore. This rule of thumb assumes that you don’t have any source of income apart from money saved during active working life.
After you know how much money you need for retirement, you can determine the time you have for retirement. Then, you can use a retirement calculator to determine how much money you’ll need to save every month to achieve your objective.
Once you know your target monthly savings, you need to determine the instruments or retirement plans which would best suit your needs and start investing as soon as you can.
Retirement planning is important because unlike unexpected events, you know that retirement is approaching. Because it is a certain event, and you can’t peer into the future to see what your financial condition looks like, it makes sense to set aside money for this certain event in life. Starting early is also important because it puts less pressure on your finances later on. Further, it gives your pension plan more time to provide you better returns. Uncertainties later on could be detrimental to your chances of securing the corpus you need on retirement. The biggest benefit of retirement planning is the financial independence it provides you.
What are the different types of retirement plans?
(a) Deferred annuity: A deferred annuity plan allows you to choose the duration after which you receive your payment. Hence, a 25 year deferred annuity plan means that you will contribute to the plan for 25 years and will start receiving annuities for the rest of your life from thereon.
(b) Immediate annuity: An immediate annuity plan starts paying annuities immediately after you pay a lump sum amount upfront.
(c) Plans with or without life cover: Retirement plans with life cover pay the sum assured in the plan to the nominees of the investor if he dies during the accumulation stage of the plan. On the other hand, plans without life cover pay accumulated premiums until date with interest to nominees in case of death of the plan investor.
(d) Work-based retirement plans: They are of two types – defined benefit pension plan and defined contribution pension plan. You need to decide the best pension plan for yourself.
(e) Government schemes: Government offers plans like Employees’ Provident Fund, Public Provident Fund, and National Pension Scheme which are quite popular as retirement plans.
One of the best and time-tested ways to double your money is to control your expenses. But apart from that, bonds and schemes investing into fixed income instruments can help. Best retirement plans include instruments like tax free bonds, Kisan Vikas Patra, Non-Convertible Debentures, National Savings Certificates, are among the top retirement savings plans that can help you double your retirement money.
A good rule of thumb to double your money is the rule of 72. According to the rule, the time required to double your money is 72 divided by the rate of return. Therefore, with a rate of 9%, you can double your money in 8 years. The best pension plans of 2020 can be planned as per this.
In broad terms, the first step in retirement is to assess your financial condition or pre retirement planning. This includes your current income, expenses, time left in retirement, and the retirement corpus required.