The average life expectancy of people has increased. Most people prefer living in nuclear families. At one point in life, everyone stops earning. Often, we find earning life and retired life are almost equal. Elderly parents do not like to depend on their children. They take care of their day to day expenses, medical care, ageing related issues and lifestyle expenses for two decades and more. Their financial freedom depends on their retirement planning at a much early stage of life.
When to start your retirement planning
Ideally, retirement planning must start the day one starts earning. In practice, you start paying contributions for the Employee Provident Fund (EPF) or National Pension System (NPS), when your employment starts. So that way you start building your retirement corpus unknowingly. So why not make informed decisions and optimise your investment towards your retirement goal?
Money loses its purchasing power with time due to inflation. So, everyone requires a retirement corpus in hand when earning ceases, despite their profession, to get an inflation-adjusted inflow of funds at a regular interval.
The Process of Retirement Planning
Retirement Planning is a three-step process.
1) Identify your present expenses. Identify which part of your present expenses should continue after retirement. What percentage of your present lifestyle will you need to maintain post-retirement?
2) Specify your retirement age and expected life span of yourself and your spouse. Understand the rate of average inflation in the pre and post-retirement years. Now, determine your retirement corpus required at the time of retirement.
3) Once the value of the retirement corpus is derived, one needs to approach a suitable method of investing. First, consider the expected future value of statutory retirement funds like EPF/Gratuity. The amount left must be achieved by suitable investment. Investment in equities should ideally cease five years before retirement and funds should be kept in a safe instrument.
A salaried person having a recognised Provident Fund or Gratuity facilities will have a reasonable retirement corpus built-in. A person who earns from a business or profession does not have a retirement fund by default. They need to build their retirement corpus from the first day of earning, in a suitable long-term investment vehicle, regularly and systematically. So, retirement planning is indispensable for anyone and everyone.
Most Well-known Retirement Planning Products in India
There are a few recognized retirement products available and known to all of us. These are the most useful if we know their functionalities:-
1) Employee Provident Fund (EPF)
2) Public Provident Fund (PPF)
3) National Pension System (NPS)
4) Employer’s Gratuity Scheme
Employee Provident Fund undoubtedly is the best retirement product, in terms of safety. The same is with the Public Provident Fund. Any small amount, deposited regularly in the PPF shows the power of compounding. Indian residents can have a PPF account. It can be opened at any age and also can be extended up to any age. Both a Recognized Provident Fund (RPF) as well as a Public Provident Fund (PPF) bear Exempt-Exempt-Exempt (EEE) tax status, that is the amount deposited, interest and maturity amount – all three are exempt from income tax. However, Unrecognised Provident Funds do not enjoy this benefit.
The National Pension System is expected to result in better returns in longer-term than the safer products. An investor can opt to choose his equity exposure and his fund manager for this scheme. An important point to note – NPS funds can invest only in index stocks or index funds in equity. Hence the risk of equity exposure is limited, so is the return.
A monthly SIP in a long term blue chip Equity Fund may result in a good return in the very long term and build a retirement corpus.
The sooner you start planning for retirement, the better return you get, and experience less stress! It’s easier to set aside savings at an early stage than starting late when already your responsibilities have increased and you find it difficult to allocate an investible surplus.
Get in touch with our team if you’d like to know more about retirement planning or if you’d like to discuss a suitable retirement plan for you.
If you too have a question, share it in the comments below or DM us or call us – 91 9051052222. We’ll be happy to answer it.
– Aditi Nundy
