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Retirement Planning
Retirement planning is the process of preparing for the financial needs of your retirement years. This involves saving for retirement, managing your investments, and protecting your assets and income.
Timely Planning is the way to #RetireOnYourTerms!
Start saving for a financially secure tomorrow, today! Retirement planning helps you make the most of your retired life.
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
Written By:
Vishal Subharwal
Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.
Reviewed By:
What Is Retirement Planning?
Retirement planning is about planning for a secure financial future post-retirement. Retirement planning in India entails purchasing retirement plans that involve investing a certain amount regularly to create a large corpus that provides steady payments after retirement. As a ground rule, it is essential to start retirement planning as soon as possible; the earlier you start the better.
That’s because when you initiate retirement planning in your 20s or 30s, you have adequate time to save up and build a significant fund that will help you lead a comfortable life post-retirement with a help of a retirement plan.
Retirement planning is essential in ensuring a steady stream of income, so that you don’t have to compromise on your lifestyle or financial independence. It’s crucial to identify your financial goals and create a framework of expected expenses and income. You can also use the retirement calculator to understand how much you need to grow your wealth before you retire. Also you can use the pension calculator to identify the pension amount needed to serve your needs.
One of the most important steps for retirement planning is saving up for the future. It may seem counterproductive in the beginning, especially if you are young. However, the power of compound interest helps you grow your savings over time.
While there are several ways to initiate retirement planning, investing in a comprehensive retirement plan is a good idea. Not only does it help you inculcate financial discipline, it also helps you put money aside every month to save up so that you can create a corpus for regular income in the long run
Types of Retirement Plans
Immediate annuity plans
Annuity plans help a retired individual with regular monthly payments. How does this retirement plan work? After one has made a single lump sum investment, the annuity payout begins within a year. This option is particularly helpful for those who are nearing their retirement and require a feasible option.
Deferred annuity plans
As the name suggests, this kind of annuity plan works differently than the one mentioned above. Here, the investor decides the time period over which they want to receive the annuity payouts. In this case, an individual makes small payments over a period of time to create a large corpus for retirement.
Senior citizen savings scheme
This government-backed scheme offers regular income to individuals post-retirement. This type of plan can be availed by retired persons who are over 60 years or above, or even by those who fall between the range of 55 and 60 years.
The investment can be as low as Rs 1,000 in a year while the maximum investment goes up to Rs 15 lakh. The initial time period for investment is five years that can go up to an additional three years after maturity. The current interest rate for such plans is 8.2% per annum for 2023-24.
National Pension System
NPS can be extended to individuals who fall between the range of 18 and 70 years. The tax benefits under this plan can go up to Rs 2 lakhs in a financial year and works best for those who have a moderate to high risk appetite. This is because investments are largely in market-linked instruments including equities and debt funds. Investors can also opt for corporate, government bonds and alternative investment funds. The National Pension Scheme account matures after the investor turns 60 years old.
Why Plan for Retirement?
Let’s better understand why you need to plan for retirement.
Preparing for a Longer Life
Advancements in healthcare and awareness about healthy lifestyle choices have increased India’s life expectancy from 68 years in 2015 to 69.7 years in 2020. With India’s growing life expectancy, people today have to plan their finances expecting to live longer than earlier generations. Retirement planning is not just about saving money. It is also about ensuring that the retirement savings will last throughout the retirement years. To achieve this, one needs to plan for retirement with a long-term view, considering inflation, increasing healthcare costs, and other expenses. Individuals must select retirement plans that enable them to enjoy a stress-free retirement and focus on the things that matter the most to them.
Fight Inflation
Inflation refers to the rate at which the prices of goods and services increase over time, decreasing the purchasing power of money. You must consider the impact of inflation on the cost of living while planning for retirement. If you assume an inflation rate of 5%, the cost of living will double in 14 years. So, if you’re hoping to retire in 20 years, you’d need more than double what you require now to maintain your standard of living. Retirement plans find safe avenues to invest your money and build a corpus that can help you battle the impact of inflation.
Leave a Legacy
Retirement planning enables you to leave a legacy for your loved ones. Planning your retirement helps you accumulate wealth that you can use once you retire and pass on to your loved ones. By starting to save early for retirement and investing in retirement plans that offer guaranteed returns, you can build a significant corpus over time. You can also use the accumulated funds to support a charitable cause and help make a difference, leaving a legacy that goes beyond financial wealth.
Maintain Your Standard of Living
Crucially, retirement planning enables you to maintain your standard of living once you hang up your work boots. Retirement planning involves identifying your retirement goals, estimating the expenses, and creating a plan to accumulate sufficient savings to meet them. You can use retirement plans to create a retirement corpus that provides monthly payments to help replace your regular income and maintain your standard of living. Since these plans invest your funds, they can help battle the impact of inflation on your finances.
Advantages of Retirement Planning
Financial independence
If you are someone who has earned a regular income all your life, it's natural to feel uncomfortable being financially dependent on another person in your retirement. By investing in a retirement plan, you can continue enjoying regular payouts and at the same time, can achieve the goals that were neglected when you were pressed for time. It is one of the most important benefits of retirement planning.
Life expectancy
The average life expectancy today is 70-75 years, so if you retire at 60 years, you will still have many years of retirement where you need regular income. That’s where a comprehensive retirement plan helps. You can start your retirement planning as early as 20 years or 30 years or 40 years of age.
Medical costs
As costs of medical treatments rise, it is important to have a corpus for emergencies. While a sound health insurance plan can help you tide over such emergencies during your work life, it’s better to factor in medical expenses that arise in old age as well. That’s because spending from your own pocket is not practical particularly during old age, when an individual is more susceptible to illnesses.
Tax benefits
Investing in a retirement plan can help reduce tax liability and maximise savings. You can claim a deduction of up to Rs 1.5 lakh for the premiums paid towards the plan under Section 80C of the Income Tax Act, 1961.
Peace of mind
It may sometimes get very challenging to manage money, both for short-term and long-term needs. Sometimes, health issues may crop up without notice and it’s bound to hurt your pocket, especially if you are old and do not have a regular income. With retirement planning, you can stay happy and healthy without being stressed.
Importance of a Retirement Plan
Retirement planning helps you prepare for the future. Let’s better understand why you need a retirement plan.
Prepare for Medical Emergencies
Retirement plans provide you with regular income to help take care of your financial obligations once you retire. As you grow older, you may face certain health concerns or medical emergencies that require urgent care. The payouts can help you take care of hospital and medical bills, leaving you free to focus on your health instead of worrying about your finances.
Remain Financially Independent
Nobody wishes to be dependent on others, especially not people who have worked hard for several years. Your retirement plan helps you maintain your financial independence once you retire. The payouts help you look after your bills and other financial obligations without relying on loved ones.
Help Your Family
Your retirement plan enables you to support your family financially. The payouts allow you to maintain your independence and look after your finances. Depending on the corpus you grow, you can also help your loved ones with their various goals and dreams. Retirement plans also have a life insurance component and provide a payout to your beneficiary if something happens to you. The life cover ensures your loved ones do not have to struggle financially.
Meet Your Financial Goals
Retirement plans provide you with the regular payments you need to fulfil your financial goals. The amount helps you maintain your standard of living and protect your finances from inflation. Additionally, the amount helps you build an emergency fund and repay any pending debt.
Where should you invest for retirement?
Retirement planning in India can be done by investing in a range of retirement plans that can help ensure a steady stream of income to maintain a certain lifestyle post-retirement. Currently, the retirement plans in India include annuity plans, retirement funds, Unit-Linked Investment Plans and the National Pension System.
Tips for Retirement Planning
Start Saving Now
When it comes to planning for retirement, the earlier you start, the better. Starting early gives you more time to save a corpus that will grow steadily each year. The power of compounding works better the longer you stay invested, so purchasing a pension plan in your 20s and 30s will help you enjoy a financially secure retired life.
Prepare for Future Financial Emergencies
While planning your retirement, you must consider future financial emergencies. For example, purchasing a health insurance plan and setting up a contingency fund to help with medical costs or other emergencies helps you maintain your financial independence once you retire.
Explore Life Insurance Options
Every good financial plan includes a life insurance policy. You can consider getting a term plan to secure your family’s financial future and help your spouse prepare for retired life. Ensure you evaluate your options and find a policy that provides enough support for your loved ones.
Diversify Your Investments
When it comes to planning your finances for the future, never put all your eggs in one basket. You should find ways to diversify your investments to ensure good returns over the years. Ideally, look for investment options that allow you to lower your risk by investing in different types of funds. Evaluate the various investment and retirement plans available and pick one that suits your financial goals and risk appetite.
Think About Your Retirement Goals
Finally, before you purchase a retirement plan, understand how much you would need to achieve your post-retirement goals. Consider the cost of travelling in the future or the cost of learning how to play an instrument or set up a consultancy. List your goals and carefully consider how much they would cost. Once you understand how much you need, you can work on a plan to help you achieve your target.
How do retirement plans work?
Ideally, you should start investing in a retirement plan as early as possible. This will give you enough time to create a retirement corpus for a financially secure future in the long run. Once accumulation is done, the corpus can be used to purchase annuities for monthly income post-retirement. Furthermore, even after being converted to annuities, the retirement corpus can continue to grow. The annuity payouts can either be lifelong or for a certain period of time post-retirement.
Factors to consider while planning retirement
Expected retirement age and investment horizon
It is important to evaluate your expected retirement age and accordingly plan your future. One must consider their current age, expected retirement age as well as the investment horizon to build a strategy for retirement.
Risk appetite
If one starts retirement planning early on, their risk appetite is likely to be higher than someone who begins late. In that case, they can invest in assets like equities that may be risky but offer higher returns.
Current financial situation
Another aspect that must be considered in retirement planning is an individual’s current financial situation–their expenses, lifestyle and any debts they have. This will help understand how much needs to be saved for retirement.
Spending on retirement needs
This may sound like a far-fetched plan but it is imperative to account for several expenses including housing, healthcare and other expenses that may arise during old age. Determining these expenses may be a good idea to help build a comprehensive retirement strategy for the future.
Asset allocation plan
Also, the returns earned from an investment may be lower, particularly in case of higher inflation. Once an individual has evaluated their investment goals, investment horizon, risk appetite and similar needs, they can consult an asset allocator for guidance.
Retirement Plans Eligibility
If you want to invest in a retirement plan, there are certain eligibility criteria that you must fulfil. For most pension plans, the minimum age to invest in such a plan is 18 years while the maximum can go to 70 years. In terms of the annual premium amount, there is no maximum limit. However, the minimum annual premium amount is generally around Rs 50,000. Lastly, the policy term for most pension plans falls between the range of 10 and 30 years.
You can take your pick and accordingly invest in a retirement plan that caters to your needs and requirements.
FAQ's about Retirement Planning
1 What is the 4% rule in retirement planning?
The 4% rule in retirement planning helps you make your funds last for 30 years. The rule states that you should withdraw only 4% of your corpus in the first year, and for every subsequent year, raise the withdrawal amount enough to keep up with inflation.
2 What are the 3 R’s of retirement?
The 3 R’s of retirement are:
1. Retirement Planning – It involves setting aside a portion of your income through your working years so you have enough to support you once you retire.
2. Regular Income – Once you retire, you should have the means to get a regular stream of income. For example, purchasing a pension plan or annuity helps you enjoy a regular income to cover your daily expenses and maintain your standard of living.
3. Risk Management – Once you retire, you must manage and mitigate risks as far as possible. You can invest in low-risk investment instruments that provide steady returns to combat the impact of inflation on your savings.
3 What are basic retirement plans?
India offers two types of retirement plans, Pension Plans and Annuity Plans. The two often work together to secure your finances once you retire. You can purchase a pension plan in your 20s and 30s. The money you put into the plan gets invested on your behalf and builds up a corpus for your retirement. You can then use the corpus to purchase an annuity that provides regular payouts for the rest of your life.
4 What is the retirement lifecycle?
The retirement lifecycle has three phases:
1. Pre-Retirement Stage – During this time, individuals are working and focusing on saving and investing for retirement.
2. Retirement Stage – Just after retirement, people in this stage rely on their investments to take care of their day-to-day expenses.
3. Post-Retirement Stage – At this stage, people may require additional support while dealing with age-related health concerns. Some individuals may require long-term care, which will only be possible through adequate financial planning in the pre-retirement stage.
5 What is the legal retirement age in India?
The legal retirement age in India varies across sectors. The private sector does not have any stipulated age limit. For Central Government employees, the retirement age is 60, while State Government employees have to retire at 58. For Defence personnel, the retirement age depends on their rank. Soldiers in the army likely retire between 35 to 37, while officer’s can retire at 58.
6 What is the ideal income I need in retirement?
The amount you need once you retire depends on your standard of living and expected expenses. For example, individuals who live on rent will likely require more than those who have their own homes and only have to worry about maintenance and taxes. You can use an online retirement planning calculator to better understand how much you would require.
7 What is deferment?
Deferment refers to the strategy of delaying retirement and continuing to work beyond the traditional retirement age. The approach helps people boost their savings and delay the withdrawal of their retirement funds. It can also help people stay active and maintain their physical and mental well-being.
8 What is retirement planning?
Retirement planning is a process of setting aside assets for retirement, so that one can lead a comfortable life and be financially independent even after they stop earning regular income. In a nutshell, it is a savings programme that manages assets and risks post-retirement.
9 What are the steps in planning your retirement?
There are a few steps that you must keep in mind while planning your retirement. The first step is to define the financial goals and the amount that is required to meet those goals. Next, evaluate the retirement date to figure out the investment horizon. You can use a retirement planning calculator to understand how much is needed to grow your wealth before retirement. The last step is to purchase a retirement plan and pay regular premiums to create a large corpus for a financially secure future.
Here's all you should know about Retirement Plans.
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- As per Income Tax Act, 1961. Tax benefits are subject to changes in tax laws.
- Amount of guaranteed income will depend upon premiums paid subject to applicable terms and conditions.
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