How To Plan Your Retirement

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Retirement plans are specially designed investment plans that let you save money for your retirement in a systematic and disciplined manner. You contribute a certain sum of money to the plan on a periodic basis so that by the time you reach retirement, the plan has accumulated a considerable corpus of funds. Often, retirement plans provide the dual benefit of wealth accumulation and an insurance cover.

When you start your earnings journey, you are inevitably full of optimism about what the future holds for you. At this juncture, planning for retirement is probably the farthest from your mind. However, as you get older, you begin to dream of a time when you can hang your boots, turn off the alarm clock, and enjoy life at leisure. This is when you might start planning for your retirement. This is also when you realise that you are already very late to the retirement party.

Here’s what you should know about planning your retirement.

How a Retirement Plan Works

A retirement plan will secure your life post retirement. For instance, say you are currently 32 years old, earn a monthly income of INR 50,000, wish to retire at 60 years, and expect to live till 80 years. The first thing that you need to do is assess the amount of money that you will require on a monthly basis during retirement. For this, you must consult a financial advisor to help you determine the following steps:

• Calculate your current and expected future income, including income from investments (I)
• Calculate your current expenses and estimate outflows during retirement (II)
• Calculate your requirement – This is the difference between (I) and (II) and will tell you the amount of money that you require to lead a comfortable and secure retired life.

To achieve this, you need a suitable retirement plan. Based on calculations that take into consideration an expected rate of return and average inflation over time, you can start contributing a certain sum of money to a retirement plan. This is how it will work.

Accumulation phase: You can choose to either pay a lump sum amount or contribute at periodic intervals. Either way, the money contributed will grow over a period of time to accumulate into a sizable corpus. This is the accumulation phase of your retirement plan. In our example, the accumulation period would be 28 years.

Benefit from the power of compounding: The money contributed by you will be further invested to generate optimal risk-adjusted returns. It is recommended to buy a retirement plan as early as possible so that you can increase the return potential of your plan through the power of compounding.

Vesting age: This is the age from when you will start receiving your pension, that is 60 years.

Payment period: This is the period for which you will receive your pension payments post-retirement. In our example you plan to receive your pension from the age of 60 years to 80 years, your payment period will be 20 years. This is also known as the annuity phase. However, depending on the plan that you have chosen, you might be allowed a partial or full withdrawal in the accumulation phase as well.

Three Main Types of Retirement Plans

Annuity Plans

These are specifically designed plans that can provide you guaranteed income during your retirement period either for life or for a stipulated time period. You can use an annuity plan to create a retirement corpus from which a regular income, called annuity or pension, can be earned after reaching a certain age.

An annuity plan can protect you from outliving your savings as it guarantees a certain income. More importantly, since the payout is fixed for life, you do not need to deal with the risk of re-investment. These variants that are attractive for those who want to secure their investment beyond their own life:

• Return of purchase price on the death of policy holder to the nominee
• Joint life annuity: In this case the spouse continues to receive a pension income after the death of the primary policy holder

There are two main types of annuity plans:

• Immediate annuity: If you opt for an immediate annuity then you can start receiving the pension within one year of paying the premium amount. This means that you can start receiving the annuity payments as soon as you make the initial investment. This plan would be most suitable if you are close to your retirement.

• Deferred annuity: If you opt for a deferred annuity then you have the freedom to choose the timeframe or period over which you would like to receive the annuity from the insurance company. This type of plan would be most suitable if you are still working and have some years before retirement.

Unit Linked Insurance Plans (ULIPs)

These plans offer you the dual benefit of insurance coverage coupled with an opportunity to generate investment returns.

• When you opt for a ULIP, the value of the cash or returns paid by the insurance company is determined by the value of your investment portfolio.
• Your premium is divided into two portions: one that is segregated to offer protection and the second that is invested in a market-linked asset class that you are free to choose. This way, through exposure to debt and equity investments you can generate returns as well as protect the investment corpus.

The best part of ULIPs is that they allow you to choose the type of investment based on your risk profile and return requirements. It can prove to be a good vehicle to generate long-term returns while taking advantage of insurance protection. The type of ULIP can be selected based on your individual requirements, i.e. the amount of coverage and returns required.

The options available include:

• On basis of investment
  
  • Aggressive ULIP: 80%-100% of the investment amount is invested in equity instruments
  • Balanced ULIP: 40%-60% of the investment amount is invested in equity instruments while the balance is invested in debt instruments
  • Conservative ULIP: 20% of the investment amount is invested in equity investments while the rest, i.e. 80%, is invested in debt instruments
  • On basis of death benefit
    
    • Type I ULIP: The beneficiary gets the sum assured or the fund value, whichever is higher
    • Type II ULIP: The beneficiary gets both the assured value and the fund value

    National Pension Scheme (NPS)

    This is a voluntary retirement scheme that can be quite effective in helping you accumulate the desired retirement corpus. It is available to all Indian citizens between the age of 18 and 65 years. Further, you can start a NPS even at the age of 60 and continue to contribute till you reach 70. On turning 60, you can withdraw 60% of the fund, either at once or in a phased manner from the retirement account. The balance amount is used to buy annuity.

    There are primarily two types of NPS accounts.

    • Tier-I – This is a retirement account and is mandatorily opened when you invest in NPS. This account allows withdrawals only after you have attained the age of 60 years. However, there are conditions under which partial withdrawals are permitted.
    • Tier-II – This works like a savings account. This does not impose any restrictions on withdrawals.

    First, let us understand how NPS categorises asset classes.

    • Asset Class E – Equity market instruments
    • Asset Class C – Fixed income instruments other than government securities
    • Asset Class G – Government securities
    • Asset Class A – Alternative investment funds (AIFs)

    Next, let’s understand the asset class bifurcation based on your investment approach.

    • Active: You can decide the amount to be allocated amongst the above four asset classes. The maximum allocation to Asset Class E reduces as you get older. For example, if you are 50 years of age, then you can only invest up to 75% of your portfolio in equities which is Asset Class E. Further, your allocation to Asset Class A cannot exceed 5% of the portfolio.

    Table 1: Equity Allocation under Active choice:

    Age in years	Maximum equity allocation
    Upto 50	75%
    51	72.50%
    52	70%
    53	67.5%
    54	65%
    55	62.5%
    56	60%
    57	57.5%
    58	55%
    59	52.5%
    60 and above	50%

    • Auto: In this option, the asset allocation is determined based on your age. Within this, there are three options available: aggressive, moderate, and conservative.

    Why You Should Buy Retirement Plans

    The retirement phase is often referred to as the golden years. To ensure that it is indeed all that you imagined it to be, you should buy a retirement plan. Here is a list of reasons why buying a retirement plan will be one of the wisest decisions you can make in your life.

    Age is just a number: According to a United Nations report, the share of population in India over the age of 60 is projected to increase from 8% to nearly 20% in 2050. However, you don’t need to bury your dreams and aspirations once you reach retirement. Instead, you should treat it as the beginning of a new journey, albeit one that requires more financial support.

    Bottom Line

    It is never too early to start planning for your retirement. In fact, you will put yourself in a wonderfully sweet spot if you start planning for your retirement early on.

    Once you start, continue investing for your retirement in a disciplined manner. This is where retirement plans can play an integral role as they not only help you create the desired corpus but also inculcate investment discipline.

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    Dhirendra Mahyavanshi Contributor

    Dhirendra Mahyavanshi is the co-founder of insurtech company Turtlemint. He has over 16 years of experience in the insurance, e-commerce and fintech sector. Mahyavanshi is an alumnus of IIM- Calcutta and has a bachelor’s degree in engineering from DJ Sanghvi College of Engineering.

    Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.