In India, the joint family system is diminishing and nuclear families are becoming more prominent. Improved healthcare and sanitation facilities have increased life expectancy among Indians. The result is that people need to plan for an additional number of years after their retirement.
Planning for these years is crucial and must be done as soon as you commence your career. Currently, there are several options available to ensure that you will enjoy financial independence and stability during your golden years.
Retirement planning options
. Retirement plans: Annuity provides periodic payments during the post-retirement years. Some of the widely used retirement plans include:
- Employee Pension Scheme (EPS): A component of the Provident Fund (PF), this is mandatory for private sector employees with a monthly basic salary of INR 15,000. Employers match 12% of the employees’ contributions, of which 8.33% is contributed towards the EPS. The remaining is distributed among employees’ deposit linked insurance (EDLI) and administrative fees.
- National Pension System (NPS): This is a new pension system with a defined contribution mechanism. Initially, it was mandatory for central and state government employees, but it has now been made available to private sector personnel and non-resident Indians (NRI). On successful application, the investors receive a unique Permanent Retirement Account Number (PRAN). Contributions may be made to Tier I and/or Tier II accounts. Tier I is the primary account with a minimum annual contribution of INR 6,000 and withdrawal restrictions. Tier II is an optional account with no limitations on contributions and withdrawals.
- Insurance company annuity schemes: When an individual opts for the national pension system, he or she needs to convert at least 40% of the accumulated corpus into an annuity plan. In addition to this compulsory conversion, investors may choose annuity plans offered by various insurance companies. Individuals who are not part of the new pension system may purchase immediate and deferred annuity plans, based on their personal needs and age.
- Mutual funds are another good option to include within the overall retirement portfolio. During their earning years, individuals may acquire units of equity-linked savings schemes (ELSS). In addition to creating a corpus through such investments, subscribers could enjoy tax benefits under section 80C of the Income Tax Act. On retirement, individuals may adopt a systematic withdrawal plan (SWP) to earn a regular income during the later years. A safe option for this purpose is moving the corpus to debt schemes, where returns are not related to market performance.
Building a retirement corpus is vital to achieving financial independence. Several factors must be considered while investing in different products during the working years. Some of these include:
- Determining how much money you are capable of contributing towards planning for retirement before making your investments will ensure you do not face liquidity crunches
- Individuals must consider their financial objectives in the short, medium, and long-term to ensure they will choose the right retirement planning products
- Taking help from an online tax calculator to understand the tax implications of your decisions is important
- Many people often overlook inflation and end up accumulating a much lower than required retirement corpus; avoiding this error is crucial
- Understanding the risk-return appetite before you start retirement planning and investing will be advantageous in the longer term
- Being disciplined in your investment options approach and avoiding discontinuing your plan due to difficult circumstances is very important
Financial and retirement planning is a complex process. If you do not have the necessary understanding and expertise, seeking professional assistance is a good choice.