What is retirement planning?
Retirement planning refers to the process of budgeting and investing to meet financial needs after one has finished working.
A retirement plan usually considers an individual’s current income, expenses, investments, risk tolerance, retirement age, and expenses.
By setting the projected income and expenses, one can calculate the necessary size of a retirement corpus and choose suitable investment instruments to reach the retirement savings target. One can project how much one expects future income and expenses to be, and determine whether the retirement corpus might be enough to fund post-retirement needs.
Retirement planning should never be viewed as a one-time task. An individual should periodically re-examine income, investments, expenses, retirement age, and goals, and make necessary adjustments.
Importance of retirement planning in India
Retirement planning is important because usually, employment-related income drops or disappears after retirement, while retirement expenses such as medical bills, food, housing, everyday needs, and childcare may still occur. Having a clear plan about retirement needs enables one to prepare financially and remain independent after retirement, and reduce the likelihood of relying on family support for long after one stops working.
Protection against inflation and economic volatility
The cost of products and services tends to increase during inflation. Therefore, one needs to prepare for retirement expenses that might exceed current expectations. A well-rounded portfolio can protect one against inflation and economic uncertainty.
Lower dependence on pensions and government support
Government and employer-sponsored benefits can supply an important part of retirement income, but they may not be sufficient to fund all retirement needs. Depending on employment type, an individual can receive benefits from employee provident funds, employees’ pension schemes, the national pension system, public provident fund, and other retirement-related savings vehicles.
Preparing an independent retirement corpus can give one more control over post-retirement income and expenditure.
Building wealth and providing for one’s dependents
Having a retirement plan can also help one achieve personal financial goals and provide support for one’s dependents, such as children and elderly parents. Estate planning, along with nominations and ownership of assets, can facilitate the transfer of wealth to one’s heirs.
Tax considerations
Some retirement planning instruments, notably those sponsored by employers, may offer tax benefits, depending on applicable laws and regulations. For example, contributions to NPS may have tax benefits, while employer contributions to retirement funds may be eligible for a different set of benefits, up to a specified limit.
Tax laws and regulations are subject to change, and therefore investors should consult relevant rules and regulations applicable during the relevant tax year, rather than any previous ones.
Compounding potential and long-term growth
The earlier one starts retirement planning, the better, because long-term regular investments allow compounding to take effect and build a larger corpus than short-term irregular investments would. Starting to invest during the early years of one’s career will usually give a significant advantage over waiting until one is closer to retirement.
Major retirement planning options in India
India does not have a retirement planning system exactly similar to the US 401K or the Roth IRA. Usually, individuals can choose from a variety of retirement savings instruments, depending on one’s employment status, personal financial situation, and risk tolerance.
Employees’ provident fund
Employees’ provident fund is an important retirement savings instrument for employees.
Eligible salaried employees contribute to the provident fund, along with their employers, and can use the fund during retirement to provide for post-retirement needs.
National pension system
National Pension System is a type of retirement savings vehicle, which is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS is available for purchase by eligible Indian residents and other eligible categories of residents. Eligible subscribers can choose their pension funds and the allocation of their pension assets between conservative and equity instruments, depending on their needs.
NPS can be used to accumulate a retirement corpus, which can be converted into an annuity, or paid out as a regular income stream during retirement. Upon retirement, subscribers can withdraw up to 60% of their accumulated pension wealth as a lump sum, and purchase an annuity with the remaining 40% of the corpus, depending on the applicable regulations and the size of the corpus.
Public provident fund
Public provident fund is another retirement planning instrument, which can be used to save for post-retirement needs. The guaranteed nature of the investment and the long-term deposit profile make it a useful addition to a diversified portfolio of retirement investments.
Mutual funds
Equity mutual funds and other market-linked investments can also be used to supplement retirement needs.
Individuals should assess their retirement goals, needs, and risk tolerance, and choose the allocation of one’s retirement portfolio between market-linked and fixed-income instruments.
A diversified portfolio of retirement investments can reduce the risks associated with a single investment option.
Annuity
Annuity products provide a guaranteed income stream during retirement. They can be used as a retirement income supplement, but prospective buyers should consider various factors before purchasing an annuity, such as the interest rate on the contract, tax implications, inflation, and the method of payment.
Conclusion
Retirement planning allows one to budget and invest to provide for post-retirement needs. Various retirement savings instruments, such as employees’ provident fund, national pension system, public provident fund, mutual funds, and annuity products, can facilitate retirement planning in India. The goal of retirement planning should not be solely to increase the size of one’s retirement corpus, but also to provide for one’s needs during retirement, including healthcare and other essential expenses, and to remain financially independent after one stops working. Starting to save and invest for retirement early helps build a sufficient retirement corpus to fund post-retirement needs, while also allowing one to enjoy one’s free time after one stops working.
