Early
planning for retirement is imperative in today’s age wherein advancements in
medical science have helped increase life expectancy. In addition, a wide
choice of career options and a fast paced life has evoked the thought of early
retirement in the minds of the younger generation. With increased longevity and
the urge to maintain a similar lifestyle in one’s post retirement phase as
well, the need for appropriate retirement planning is
an imperative.
According
to survey conducted in 11 tier 1
and tier 2 cities to understand the current state of financial planning in
urban India, consumers are skeptical about the adequacy of their financial
plans to meet their desired standard of living throughout their lifetime. In
fact, only 13% of youth and women are extremely confident that they have
adequate retirement planning in place. Though the Wisdom investor segment (45
years and above) scored better in the level of confidence yet their percentage
stood at only 24%.
The
study clearly points out that while we postpone a lot of simple joys of life to
our retirement period, we do not adequately prepare ourselves during the prime
time of our working lives to focus on building a war chest. These joys could
range from travelling to cherished destinations to owning much coveted luxury goods
or simply indulging in an expensive hobby.
In
the absence of a formal social security framework in our country and inadequate
statutory retirement funding (by both employers and self), there is a greater
need to evaluate in advance the options available for retirement income planning.
A clear definition of our retirement needs is the first step towards adequate
provisioning for retirement. The answer to this lies in two basic questions –
“HOW MUCH MONEY would we need when we retire?” and “WHAT PART OF OUR INCOME
should be invested towards building that corpus?”
Having
quantified our retirement needs, we need to also look at suitable instruments
that are tailor-made to fulfill such needs. Let me talk about two such
instruments which are customized towards fulfilling retirement planning goals.
Pension and Annuity
An
exclusive category of products offered by Life Insurance companies in India is
Retirement Solutions, which is a culmination of two phases – accumulation phase
when we build our retirement fund by
investing in a Retirement Pension Plan
before retirement and redemption phase in the form of regular and guaranteed
income for life post retirement through an Annuity plan.
I
feel that Pension and Annuity plans should never be looked at in isolation.
They are two sides of the same coin. A combination of these two plans is a good
investment avenue that takes care of longevity risk, i.e. risk of us outliving
our savings.
The key benefits of a Pension and
Annuity combo are:
1.
Flexibility to choose the tenure depending on one’s retirement
age
2.
Hassle free transaction giving the process an OTC feel (online
options available)
3.
Advantages of tax efficiency under sec 80 CCC and 10(10A) of the
Income Tax Act 1961
4.
Derisking from market volatility once Annuity is purchased
5.
Benefit from the power of compounding commences early
6.
Ensuring by virtue of regulations that funds for retirement are
actually utilized accordingly
7.
Wide range of Annuity options to choose from (including Return
of Premium) and ability to customize features like payment modes etc. as per
need
8.
Doing legacy planning for loved ones
National Pension System
National
Pension System (NPS) was introduced by the Government of India with an
objective to extend old age security coverage to all citizens. Launched in
January 2004 the scheme is now more than 10 years old. At inception the scheme
was made compulsory for all new Central Government employees (excluding Armed
forces) by scrapping the old pension structure for them and that was soon
followed by the State Government employees as well. It was only in May 2009,
that the scheme was made available for all citizens of India.
In
the basket of investment tools
currently available in the market NPS clearly stands out. It offers subscribers
the option to choose service providers, fund managers & investment schemes
along with flexibility to switch amongst the same if desired. The NPS account
is fully portable and offers an online platform that enables subscribers to
access their account details 24X7. The NPS contributions also provide
subscribers with an additional tax saving sunder section 80 CCD (2) benefit as per the
Income Tax 1961.
Retirement
planning is an ongoing and systematic process. It is advisable that we
introspect, study our needs and aspirations, draw a timeline and observe
discipline in doing so. The earlier this process is initiated, the better it
is, as we can gain from the power of compounding as well as aim for a higher
return in order to lead a comfortable life in our golden years.
No comments:
Post a Comment