Retirement planning is crucial to ensure that you don’t outlive your savings especially when life expectancy is on the rise. Retirement planning essentially involves planning your finances in such a way that you can achieve your pre-retirement and post-retirement financial goals without any stress. And then in your second innings you can even pursue hobbies and interests that one couldn’t do while having an active career.
Anand Pejawar, President – Operations, IT & International Business of SBI Life Insurancesaid, “Retirement is the phase where you have the opportunity to lead life the way you wanted, you can plan things how you wanted; do all that you couldn’t do earlier, and ensure that finance does not come in the way of reaching your post-retirement goals.”
Understanding the retirement need
Every individual must understand their retirement need because it is the prerequisite for planning and helps determine the exact investment requirement.
“Up to the age of 60, your income is going up; your expenses were at a maintainable level. Post-retirement, your income is constant but your expenses go up, so you have to find a way to bridge the gap,” says Pejawar.
More importantly, the value of money also keeps decreasing due to inflation as one’s age goes up over a long period of time. According to research, if your estimated monthly expense is Rs 1 lakh, then after 10 years, your expenses will be around Rs 1.4 lakh after adjusting for inflation. Alongside, the value of the savings will come down to Rs 67,000. Also, as longevity is increasing, that same Rs 1 lakh, on crossing the age of 60 years, will go upto Rs 1.6 lakh while the value of money will go down to Rs 32,000, following inflation.
This highlights the major gap between income and expenses — the value of saving declines while expenses go up due to inflation.
“So it is important to understand your financial and retirement goals which may include travelling, writing a book, or farming etc. Analyze your present financial situation – loans you have and the assets you have created. It is then important to analyse all the avenues available for retirement planning and not to put all your eggs in one basket,” advices Pejawar.
He cautions that many people put their entire fixed deposit in the same bank for 1 to 2 percent higher interest rates irrespective of knowing the risks involved.
One needs to keep on revisiting the investment portfolio to diversify risks, advises Pejawar.
Also with increasing longevity, according to actuarial calculations based on census, life expectancy of an average Indian male is now estimated to be 71 years and for females it is 78 years.
There is an automatic responsibility on men to ensure that their wives, who may have longer lives, are also taken care of in the retirement plan, particularly with the rise in nuclear families.
And amid the pandemic, the cost of medical treatment has also gone up. This is particularly important because since 2004, India has moved away from a defined benefit pension scheme to a defined contribution scheme.
Post-2004, defined benefit schemes were largely moved to the national pension scheme.
Ways to invest in Pension / Annuity schemes:
There are 2 pension schemes available in India today.
1) Deferred pension scheme – You can start investing in this scheme from any age. The younger the better. Depending on the starting age, one can start with smaller amounts as this is the accumulation phase. This pension scheme is offered by life insurance companies or by the National Pension Scheme (NPS) provider.
As far as life insurance is concerned, there is a deferred annuity plan. This depends on when you start it and at what age you want to start getting the annuity.
Normally, at the age of 60, people prefer to stop their accumulation phase and whatever you have invested, including accumulated interest, can be converted into annuity.
You can also commute a certain percentage of this corpus, which will be tax free, while the balance amount can be taken as annuities.
2) Immediate annuity scheme- The second pension scheme is where a retiree who has got his retirement benefits (Provident fund, Gratuity, etc.,) or other savings can purchase an immediate annuity plan. From the next month onwards, one will start receiving a fixed amount based on the variant of the annuity chosen.
Pejawar said annuity must consist of a sizable portion of your retirement plan.
Annuity is the only product, which is currently available that gives you regular periodic income, without getting impacted by external factors, such as interest rates, which impact the return on funds.
This is a guaranteed return one continues to get depending on the term and type chosen. This benefit of annuity is not available in any other schemes which are available for retirement plans.
Choosing your annuity provider
Life insurance offers two types of annuity plans. For immediate annuity, you need to evaluate whether the company you are investing with has a record on their returns and what is the rate of interest they have generated in the past years.
“Like mutual funds, the past performance doesn’t guarantee you about the future returns but you get an idea of what is the investment philosophy and psychology of the particular fund manager or the company, and what is it that you as a customer can expect from your investments,” he said.
One must also carefully evaluate and understand the variants of annuity offered by the insurer. “So every product that you will buy will have its features, advantages and benefits. You will find that each company gives some variants to attract customers.”
Normally you will see in a deferred annuity plan, there will be some amount of life insurance cover though there are plans without life cover also. “Look at these products and understand your own requirements – is it pension with life cover or without life cover?” says Pejawar.
Choosing the correct variant of the annuity is very important. Many customers make a mistake as they do not evaluate the plan they have purchased, he cautions.
Various types of annuities
There are 14 different types of annuities available in the life insurance market today. For example,
Annuity for life, which one can start at your agreed vesting age and will continue to receive it till one is alive.
Annuity of life with return of fund value: Here, if one has Rs100 as capital, then one will earn annuities based on the interest that the company earns on the fund and if something untoward happens to the annuitant, the nominee will get the fund value (initial capital) Rs 100 back. This is called return of capital or return of fund value.
Another widely used variant is lifetime income for the annuitant till they are alive and 50 percent to the spouse on the demise of the annuitant.
Similarly, there are many such variants, which the annuitants have to choose carefully depending on their individual needs.
Pejawar also says that one should not mix life insurance and annuities because as you age your mortality risk rate increases, so the premium on life insurance cover keeps on increasing.
Life insurance if required can be purchased separately.
He points out that in all other current investment avenues available, there are ups and downs which can directly impact your return on investments and thus your income post retirement. But in annuities that is constant for a long period of time.
Consequently, he adds the problem that faces most Indians today is not “if you die too early” but actually, “if you live too long”. So insurance was earlier considered to be good only if you die early but today, the concept of buying insurance has completely changed. It helps you in both cases. If you live long, (which will be the case in most times) it becomes your retirement kitty and you can use this money in a much more effective manner.”
Sir, very encouraging words.
Very good and informative.
Mr Anand Pejawar (President,Ops &IT) explained very nicely which layman can too understand ……
The clarity given on Annuity and need of Life Insurance helps one and all from investment and life cover requirements point of view ..
I know it would have been too long but I personally feel some brief discussions on various other investment like SCSS,PMVVY Bank Deposits instruments like RBI Bonds ,Debt Funds etc would help senior citizens .
Overall wonderful article .
Thanks
Very good information
Very good article! Key aspects like nomination, will preparation, annuity with or w/ o life cover etc have been well explained and simplified for understanding purposes.
Either the expenses will go up due to inflation or value of money will come down due to inflation. Both will not take place
Dear Anand, valued discourse. Thanks. 2 issues – GST that lowers effective rate and 2. Life certificate. 3. Liquidity not available in an emergency. FD preferred, even if there is reinvestment risk. Your thoughts
Very informative Sir.. Clear and concise!
Excellent comprehensive coverage in layman’s language for the pre retirees to get organized at the right time 👌
Very insightful and useful article. In today’s fast moving phase many people forget why they are running. This article made them understand how their hard earned money can benefit their loved ones without any hassle and how one can accomplish his financial goals. Interestingly the entire episode is in simple terms which can be visualised and felt by the readers. With Best wishes Sir.
Very Informative Sir. An eye opening article.
Regards
Very Informative Sir,
An eye opening article.
Regards