Categorized | Pension Insurance

How to Go About Retirement Planning

As life expectancy is increasing the retirement phase is gaining significance. Many people during their working phase look forward to having a great time in retirement days.

Financial constraints start affecting daily routine and habits making life really miserable. It is important that while you are young and earning, you give some thought to your retirement life. Retirement gives you all the time in the world to do what you feel like. But to deserve all this, do not forget to make the right investments in a retirement plan or a Pension plan.

What retirement corpus is good enough for your retirement needs?

The most basic aspect about retirement planning is accumulating a minimum retirement corpus which is good enough to meet your basic living expenses when you retire. Most retirement plans would allow you to withdraw one third of the retirement corpus upfront while the rest would be given in the form of annuities. If you choose Annuity for life time you can expect about 5-7 % of your retirement corpus as annual income (as per current standards). So, essentially the monthly income you get from your retirement plan should cover your living expenses well.

While estimating your living expenses during retirement do make sure that you apply the impact of inflation. Mr. Sharma who belongs to Delhi and works as an employee in a leading public sector bank is 30 years old and had about 30 years to go for retirement. He spends about INR 30,000 every month to meet his living expenses. Assuming Inflation rate at 4%, by the time Mr. Sharma would retire his living expense would have shot up to 1 lakh per month. Hence Mr. Sharma is looking for a retirement plan that can help him accumulate enough retirement savings so that he gets at least INR 12 lakhs in annuities. Assuming an annuity rate of 6% then, Mr. Sharma would need to accumulate a retirement corpus of 240 lakhs. A pretty challenging number to achieve but it is not all that difficult if planned well in advance.
 

How much does Mr. Sharma need to save annually now to accumulate INR 240 lakhs


The task is uphill but if Mr. Sharma chooses to make annual savings in a retirement plan or a pension plan he stands a good chance to accumulate a retirement corpus of INR 240 lakhs by the time he retires. Mr. Sharma has about 30 years to go for retirement and he should start planning now. There are various investment options he could choose from that can help him reach his desired retirement corpus. He can either choose to invest in a traditional pension plan that is a bit more conservative in its investment approach when compared to unit linked pension plan or National Pension Scheme. As a traditional pension plan is conservative it invests almost 100% of savings in debt and so the amount of return you can expect to earn is limited – probably mid to high single digits. A National Pension Scheme adopts an investment approach that is more balanced. It changes the investment mix (debt and equity) in accordance to the changing Risk profile of the investor. As a person draws close to retirement all the investment is almost shifted debt and none into equity. If Mr. Sharma chooses to invest in a unit linked pension plan he has the option to be more aggressive in his investment approach as he can invest almost 100% of his savings into equity.

So, if we assume Mr. Sharma adopts a balanced approach and invest in a mix of debt and equity a 12% return on investment in the long Term is quite possible. If his investments grow @ 12%, Mr. Sharma would need to save INR 1 lakh annually and he would safely reach his investment goal of INR 240 lakhs.