The mere mention of the word 'retirement' brings a certain relief to those working hard daily in their 8-hour shifts. Retirement could mean relaxing at home with a newspaper in hand on a weekday morning. For some, it signifies the afternoon nap. For others, retirement can be going on a road trip with friends and family, soaking up the sun and peace around. Yes, those golden years are most-awaited by hard-working professionals like you who spend 8-10 hours every day at work.
In one word, retirement is an end to the daily struggle for the salaried persons. If you take a pension plan, you will be financially independent and free in this beautiful phase of life even if there is no incoming salary. Thus, every individual who dreams of enjoying financial independence and a blissful retired life will agree why retirement planning is crucial. More importantly for people in private jobs, a proper plan for retirement would help you determine retirement income goals, and then design an achievable path to enjoy the benefits. Read on to know more.
What is Retirement Planning?
Retirement planning is a process of setting retirement income goals and following them with the actions necessary to achieve those same goals.
An easy rule of thumb says that you’ll need to replenish 70% to 90% of your pre-retirement income to lead a good retired life. This means if you’re making ₹ 70,000 a month (before taxes), you might need ₹ 49,000 to ₹ 63,000 a month in retirement income so as to enjoy the same standard of living you had before retirement. For example, if somebody plans to retire in next 15 years, then retirement planning would have to include creating a system to actually generate ₹ 49,000-63,000 per month income from year 2034 when they retire.
If you are targeting 70% of your pre-retirement income for post-retirement usage, then you need to not only save, but also invest properly. This would mean investing in high-return assets so that your savings grow at faster rate.
Why do you need retirement planning?
One day you are celebrating your first salary and in a few decades they are cutting cake to wish you all the best for retirement as you say good-bye. Yes, life moves that fast.
Before you know, you will be facing daily living expenses, grappling with medical costs, and fighting inflation. There are always emergencies in old-age. So, having a sufficient corpus to deal with all these is crucial. Retirement is an important reality for everyone. But it is easy to lose track of a long-term goal. This is precisely why you need retirement planning.
Here are top four reasons why you will need retirement planning.
- Medical emergencies - With rising age, come new and health problems. Medical expenses make a huge dent in your finances post retirement. Studies show medical inflation is 14-15% a year. This means health costs potentially become 4 times of what they were just ten years ago. Take a proper retirement plan, and never lose sleep over long and multiple hospitalization. With a large enough retirement kitty or pension, post-retirement you will always be well taken care.
- Inflation - Price rise is a universal fact. The effect of inflation, even if it appears small in the short-term, can be massive over a few years.
A 5% inflation means Rs 100 will have the value of ₹ 95 a year later. But, a 5% decline is quite serious. Twenty years later a sum of ₹ 21 lakh will have the same purchasing power as ₹ 7.5 lakh today if inflation grows by 5% every year. In growing economies like India, the consumer level inflation can in fact be more than 5%.
Even when you are retired, some costs will always remain. You may not have EMIs, or you may not eat out much, but you will still need to buy groceries, medicines, and pay off utility bills. A good pension plan must be bought in such a way that anticipated inflation is accounted for.
- No state sponsored pension - Private sector employees in India do not have a fallback option like a state sponsored pension. Unlike the US and UK where they have state-funded/sponsored pensions or social security benefits during retirement, India so far does not have anything similar matching that scale. This means you are on your own when you are retired. This is both good and bad.
The good part is that your own pension strategy gives you the flexibility to buy a retirement plan and remain in control. Government funded pensions are a fixed amount that can remain unchanged for years. There are some small benefits for senior citizens, but there is no outright income replacement solution from the government. So, engaging in retirement planning is a smart thing to do. Once you know the goals, invest in a pension plan and get a self-sponsored retirement income!
- Nuclear families - Long gone are those days when the elderly could rely on monetary support from a big family. The culture of the Indian families is changing as couples are going nuclear and staying separately. They are also having less children. Twenty-thirty years down the line there may not be many relatives to take care of you as a senior citizen. Children, when they grow up, want to relocate for jobs elsewhere. Plus, the pressure to earn money and have a decent lifestyle would not give them enough time to allocate for parents and elders.
Hence, it is vital to plan your retirement without expecting any financial help from your immediate family. There is a lot of mental satisfaction in having the ability to buy your own spectacles, medicines, provide food for yourself and also your spouse. Why should it change when you are 60? A retirement plan allows you to always keep your head high and live a retired life full of dignity and respect.
What are the steps to retirement planning?
Retirement planning makes you prepared for a life after paid work ends. Such planning has some key components. Let us have a look at them one by one.
Firstly, you need to set your retirement goals. Arrange these financial goals into short, medium and long-term. Most of these retirement goals will require financial resources. This is where a retirement plan or pension plan comes in handy.
Second, assess your current financial position. At the age of 30-35, your financial situation will be very different from, say, somebody who is in their late 20s or in the early 40s. To achieve your retirement goals, you need to take stock of your current situation. Don’t worry if you have not been able to save much so far. The good thing is that you want to save. Without relying on your existing savings pool, investing `10,000 per month in a retirement plan from age 35 will generate well over `1.3 crore for you by retirement. This is if the corpus grows at a modest 10% annually. The final amount will be a lot bigger if the return is 12% or 15% per year.
Three, calculate the amount of money you will need for your retirement goals and account for the help you will get from current wealth. This should give you a proper amount. When done right, retirement planning will try to get you as much close to this number as possible. People who have accumulated some money so far may even reach their retirement goal faster. So, you can have retire at 55 instead of 60. Sure, sounds like music to the ears.
Four, identify retirement corpus builders. Apart from your provident fund and savings, one of the best ways to get a recurring income post retirement is by using a retirement plan. These plans fall under the category of life insurance plans. They are designed to meet your post-retirement needs. For instance, ICICI Pru Easy Retirement Plan helps create a retirement corpus for your golden years. It combines the growth potential of equity and safety of debt funds, while ensuring capital guarantee under any circumstance.
Five, set up a system to generate monthly income from retirement corpus. As a salaried person, you are habituated to getting income from our employer or from a business. With the onset of retirement, the pay cheque has to be arranged by you. A simple way to do it is taking an immediate annuity policy like ICICI Pru Immediate Annuity by investing your retirement corpus. This will ensure that every month a fixed sum of money comes knocking on your door. By giving you fixed income at regular intervals chosen by you, you can live a comfortable life in your golden years. Confidently take care of your daily expenses. Choose from benefits like guaranteed income for life, pension with annual increase and much more.
When to start retirement planning?
Like all planning, retirement planning too needs to be done beforehand. With the average work life being somewhere between 30 and 35 years, the best retirement plans are often started at the early age. This does mean that retirement planning and execution happens across different life stages. When done right, you enjoy the fruits of the retirement plan set in motion years ago.
Imagine a 25-year old starts planning for a retirement corpus of `2 crore. She will need the money when she is 60 years of age, or 35 years away. By saving and investing just `3500 per month in an investment avenue that fetches 12% per year, the 25-year old will cross the target and attain `2.3 crore. But if she decides to start the same plan just 5 years later i.e. when she is 30, she will reach just `1.2 crore i.e. half the corpus by 60. A small delay of 5 years makes a world of difference as you can see. So, it pays to start early.
A proper retirement plan will be divided into investment phase, accumulation phase and withdrawal phase. In the first phase, you save and invest money. This will likely be in your 30s to early 50s.
It is important to choose the contribution and duration of contribution during investment phase. For instance, saving `3 lakh a year for 20 years is not tough for somebody with `12 lakh annual income. Saving 25% is achievable. Be practical about saving because your financial responsibilities may go up later due to home loans, marriage and children’s expenses.
As we near the retirement age, one has to ensure that the entire corpus slowly moves away from risky assets to safe assets. When you reach retirement, the focus should be on milking this entire corpus. This can in the form of staggered withdrawals or monthly income source. Choose a retirement income plan that allows these flexibilities.
What is the Importance of Insurance in Retirement Planning?
At its core, retirement planning is all about ensuring that when your salary stops, you have an income source to take care of monthly expenses. This is the basic motive of all retirement plans. If you have an adequate income post retirement, every financial need can be taken care of with full confidence.
Life insurance plays a big role in holding a retirement plan together. For most individuals, retirement planning is something that is related to them and their family, including their spouse.
You can start saving and investing, but the risk of unfortunate death always exists. In the main breadwinner’s absence, non-working spouse may find it really difficult. So, use an affordable term insurance plan like iProtect Smart to secure your loved ones. In case something unfortunate, the spouse will get the sum assured that will help take care of their retirement situation.
In the event of survival of both spouses, the retirement goal needs to be achieved. Here, again a life insurance product that helps you save and grow your investments is a smart choice. Use ICICI Pru Easy Retirement Plan, an unit-linked Insurance plan, to grow your wealth faster.
If you get a windfall gain like share of family property, you can use the single premium option of the above plan. Under normal circumstances, use the regular premium option. Both options can deliver a monthly income after retirement, ensuring that the life you have so far enjoyed continues in a similar manner.
Many salaried people retire with a lump sum amount. This sum can be quite big, but wrong use can lead to it being completely utilized. For example, a `60 lakh corpus can seem impressive, but all it takes is some surgeries and hospitalizations to bring the value down sharply. Hence, it is important to protect the corpus, while still getting regular income from it.
An intelligent way would be to buy an immediate annuity product, like ICICI Pru Immediate Annuity. It will ensure that a fixed sum of money comes till you and your spouse are alive. Upon your death, children/nominees can get a nice legacy sum too. The fixed nature of annuity incomes gives you total protection against falling bank fixed deposit interest rates.
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ICICI Pru Easy Retirement
*On vesting, i.e. maturity, you will be entitled to the Assured Benefit or Fund Value whichever is higher and is payable provided all due premiums as per the premium payment term shown above are paid. Assured Benefit will be 101% of total premium paid which is applicable only on maturity of the policy and does not apply on death or surrender. Fund Value is the total value of the money that is invested in a fund of your choice.
**You can invest any available money in the form of Top ups in this policy provided all due premiums have been paid. The provision to pay Top ups will be available up to five years prior to your original or postponed vesting date . The minimum amount of Top up is Rs. 2000.
^On completion of the 10th policy year and on completion of every 5th policy year thereafter, there will be a guaranteed Pension Booster, provided at least five years’ premiums have been paid. This will be equal to 5% of the average daily total Fund Value over the preceding 12 months. The guaranteed Pension Boosters will be allocated between Easy Retirement Balanced Fund and Easy Retirement Secure Fund in the proportion of the values of total units held in each fund at the time of allocation. Pension Boosters will be made by allocation of extra units. Pension boosters shall not be taken back under any circumstances. ICICI Pru Easy Retirement UIN 105L133V02
ICICI Pru Immediate Annuity
^^Tax benefits under the policy are subject to conditions under Section 80C, 80CCC, 10(10A), (10D) and other provisions of the Income Tax Act, 1961. Goods and Services Tax and Cesses, if any, will be charged extra as per prevailing rates. Tax laws are subject to amendments made thereto from time to time. Please consult your tax advisor for details, before acting on above. ICICI Pru Immediate Annuity UIN 105N009V15
ADVT NO: W/II/0351/2019-20