India has one of the highest populations of youngsters, and with each passing year, more and younger Indians are joining the workforce. At the same time, India is expected to have a population of over 200 million who will be above 60 years in 2035. This section of the population will need to be able to financially support itself as the cost of living and lifestyles change.
As individuals are expected to live for 15-20 years post retirement, it becomes essential for an individual to financially secure his golden years. Added to this is the rising medical cost, which is running way ahead of the normal inflation, and the breakdown of the joint family support system.
Most working individuals in their early thirties may not even think of a life after retirement. By the time they get into their forties, the thought of retirement settles in and then begins the planning - one of the key challenges here is to make up for the time that is lost due to lack of planning early.
For example, if an individual spends Rs 25,000 a month today, at an inflation of 7 per cent, the expenses after 25 years would increase to Rs 1,36,000. Add to this medical expenses, which increase with age and other expenses - the monthly expenses could actually exceed Rs 1,50,000.
Retirement plan is a systematic process, the earlier one starts, the better it is, as this gives one the opportunity to regularly save to build a corpus. The benefit of time coupled with the power of compounding helps to create a substantial retirement corpus.
There are two key phases in the retirement planning activity - the accumulation phase and the annuity or payout phase. In the first one, the individual contributes a certain amount regularly. The annuity or payout phase is when the pension is paid out. The age from which one starts receiving pension is called as the Vesting age.
HOW MUCH DO I NEED?
A systematic approach makes it easier to estimate the amount required after retirement and accordingly select an appropriate financial savings instrument.
Calculate: Based on the current expenses, calculate the amount which will be required to financially support oneself and the family, after retirement. Companies offering pension products have retirement calculators on their websites which can help one to calculate the quantum of money required post retirement for financial independence.
Save: Regularly start saving a predetermined amount of money that will help you build the desired corpus for life after retirement. It is advisable to put aside a portion of your income as savings before expenses, rather than saving what is left after expenses.
PUBLIC PROVIDENT FUND: Public Provident Fund is a 100 per cent debt-oriented investment, guaranteed by the government of India. A minimum contribution of Rs 500 a year is mandatory. This product has a lock-in of 15 years. Partial withdrawals are permitted from the sixth year subject to certain conditions.
While EPF and PPF have been providing returns ranging between 8.5 and 9 per cent (the current returns for 2014/15 are 8.75 per cent and 8.70 per cent for EPF and PPF, respectively), the other pension products have provided higher returns primarily due of the exposure to equities. The below table depicts the performance of equity markets, the probability of positive returns and the expected returns from a regular annual investment of Rs 20,000 in equities.mosimage
EPF and PPF are tax free on maturity. For NPS the entire proceeds are taxable. Maturity amount of unit-linked plans are tax exempt provided the sum assured is 10 times the annual premium. An individual needs to ensure that their retirement planning portfolio comprises of a mix of products mentioned above. The key is to start early, make regular contributions and remain invested till retirement age.