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Retirement Planning in India - Why You Should have a Retirement Plan, Know about Retirement Plans in India
Updated : December 2, 2022
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If you are a working professional, Retirement Planning can feel like a stressful question. For a lot of us, there is a lot of knowledge gap when it comes to the question of retirement planning. Given the long-term nature of the task, it is best to stick to a set of time-tested decisions and habits so that you can prepare for a safe and fruitful post-retirement life.
Here’s a closer look at the kind of personal and financial planning that you need to do before retiring from your employment in India.
3 Reasons Why Retirement Planning is Important
Retirement planning consists of all those things that you need to do so that you can retire confidently. This goes beyond managing your finances. You will have to spend time understanding yourself, and figuring out what it means for you to retire with satisfaction. Here are the 3 reasons why retirement planning is important.
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1. You Will have to Stop Working One Day
Let's face it, you cannot go on working forever. At some point in time, it is going to become exhausting and repetitive. As you grow older you will need more time to spend on health and family.
2. Taking Care of Your Health Will get More Difficult as You Age
As the human body ages, it becomes more susceptible to illnesses. Chances of medical emergencies and complications also increase.
Given that the average life expectancy is increasing, you will likely live longer than your parents have. All this makes it important for you to start planning for your retirement.
3. To Contribute to Your Family Even During Retirement
Chances are that there are people who are dependent on you financially even after you have retired. Maybe it’s your kids or your siblings. If you want to be able to make such financial decisions without having to depend on your children, you will need a retirement savings fund.
How to Decide When to Retire
When is the best time to retire? Most people imagine retiring in their 50s or 60s. It’s always good if you can decide when you want to retire. This might feel like a complicated question. But here’s how you can figure it out. Follow these steps in your retirement planning process to ensure that your retirement plan is complete.
Figure out your Investment Goals
As a child, we were often asked 'What do you want to do when you grow up?' Ask similar questions about your retired life - What does your dream retired life look like?
Factor in Large Purchases
Unexpected expensive purchases are bound to happen, and if you don't have money set aside for those, you might have to sacrifice the things that you want to do.
Understand your Financial Habits
People generally assume that they will spend less when they get older. This is only partially true. Some studies observed that household spending on food might go down. But you may end up spending more than when you were working. For instance, some people look forward to opportunities for socialising and dining with friends, which will be costly.
Is it a quiet life which requires fewer savings? Or do you imagine extensive travel? Your goals may change over the years, but try to be as specific with your goals.
Pay Attention to Your Health
Poor Health can compromise your financial safety. The last thing you want is a financial surprise in the form of a medical bill or health complication. For this matter,
- Plan where you live - house in an accessible, affordable and manageable expense location.
- Have a mixed bag of investments by the time you are retiring. This will help you with your finances better.
Asking these questions would help you figure out the size of your retirement corpus. Alternatively, you may use an online retirement corpus calculator to accurately estimate the amount of money needed to invest for a secure retirement.
What Does Retirement Look Like? - The 5 Stages of Your Retirement Journey
Make no mistake; Your retirement is going to be an emotional journey.
It can be as emotional as your first day of school or your first day at your job. If you are going to retire soon, you must take time to familiarise yourself and adjust to your new life. Your Retirement journey can be divided into 5 stages, from planning to settling down happily.
Stage 1: Life Just Before Retirement
If you are deciding to retire in the next 5 to 6 years, you are in this stage. Most people start to pay attention to focusing on financial planning aspects of retirement during this time of their life. Although this is important, sometimes the emotional side of retirement gets neglected.
You need to be able to do things that make you happy and fulfilled during your retirement. Maybe this involves moving away to someplace you love or travelling.
This stage of your retirement journey can get emotionally overwhelming. You may be consumed by doubt and anxiety regarding how to spend your time. The best thing you can do to make life easier would be to spend time charting out where you want to be emotionally and financially.
Stage 2: Enjoying the Honeymoon Phase of Retirement
For a lot of people, retirement means freedom from the stresses and responsibilities of your work and career. This sense of liberation can last up to 2 years, or even longer depending on how you want to spend your time.
It is best to allow yourself to take things slow and ease yourself into the new patterns of life.
Stage 3: Getting Disappointed with Retirement Life
Sooner or later, you begin to feel the emotional enthusiasm wearing off, and before you know it the retirement honeymoon phase. Retirement is hyped up amongst working professionals. Once you retire from employment, it might not feel as exciting as you had thought earlier. You may end up feeling lonely or depressed and without a sense of purpose.
Navigating this stage is about finding the things that you love to do. You might have discovered and nurtured hobbies across your lifetime, even if you haven't you can always find a new hobby. We recommend finding a hobby that involves socialising or something that helps you keep fit.
Stage 4: Self-Discovery and Finding New Directions
Eventually, you will find your moorings and find ways to adapt and navigate the new stage of life. This is perhaps the hardest part of retirement - as it takes the most conscious effort. Try to enjoy this part and not get overwhelmed by this stage of life.
Try out new things - given that you have free time in your hand, use it to discover new passions. Maybe you can spend time volunteering, or looking after grandchildren.
Stage 5: Finding Stability in the New Phase of Life
This is the final stage of your retirement. You might find yourself enjoying your new lifestyle, and feeling fulfilled. You might have emerged as a new person with new drivers for your meaning and identity.
3 Ways to Start Preparing for Retirement
Here are a few things that you can start working on to make your post-retirement life easier.
1. Start Saving while Orienting towards Your Goals
Saving money for the future is a good habit but never forget to lose track of your short, medium and long-term goals while you are saving. You can start small. Over the months you can increase the amount of money you save each month.
2. Figure out your Retirement Needs
In addition to wanting a retirement income, you might have additional needs like an accessible home in your hometown, furniture modifications and so on.
3. Join your Employer’s Retirement/Pension Plan(s)
If your employer supports retirement plans such as the 401(k0 plan or EPF, you can enrol in these plans and contribute to them. In addition to helping, you build a retirement corpus, this will also reduce your taxes.
The Best Retirement Investment Plans in India
You can achieve financial independence after retirement by planning ahead of time. Once you’ve decided when to retire, you can start investing in one or more of these schemes to ensure your financial security.
Here are some of the best retirement investment plans in India that you can invest in to ensure a safe future.
1. Public Provident Fund (PPF)
PPF is a long-term retirement investment plan which is backed by the Government. If offers an attractive interest rate and return. You can open a PPF account in any nationalised bank or post office. With a minimum tenure of 15 yeast, you can start investing without having to worry about risk.
2. Systematic Investment Plan (SIP)
SIP is the best way to invest in a mutual fund for retirement planning. If you are working in the private sector this is a good way to get started with investing. SIP requires systematic investments. Also, you don’t need to have any minimum requirements to start a SIP, which makes SIP one of the best retirement accounts that you can start your Retirement Investment Journey with. Given that it makes use of the compounding effect, this is possibly the best retirement plan for late starters.
3. Fixed Bank Deposits
Fixed Bank Deposits are a traditional investment pathway in India. It is a long-term account that allows you to deposit a lump sum and offers an assured return rate. Setting up a Fixed Deposit in a bank is easy to set up, which makes it one of the best retirement plans for starters.
4. National Pension Scheme (NPS)
The NPS is a tax-free saving instrument that is available in India. This is a retirement Pension Plan that can help you save up your money. Since this is a tax-free instrument, you don’t have to pay tax when the fund becomes mature. This is one of the best tax savings instruments.
5. Post Office Monthly Income Scheme (POMIS)
Post Office schemes generally offer fixed returns on investments. This is another scheme which is Government-backed and so is a safer investment option than many other fixed-income options.
In addition to these Retirement schemes, many reliable financial institutions in India provide Insured Retirement Plans, which are also worth considering. These plans in addition to guaranteeing you a regular income sometimes come with other benefits such as death benefits and bonuses
How Can NoBroker Help?
Coming up with an easy-to-execute retirement plan can feel like a challenging ordeal, especially at a time when there are multiple options available for retirement planning and investing.
Here’s where NoBroker Legal Services can help you. Our team of experts can offer you advice on the actions that you must take over the long run of your life to ensure that you have a reliable retirement fund that can support your life goals.
FAQ
A 401k retirement plan is an employer-employee collaborative contributory pension plan similar to the Employees’ Provident Fund. In addition to having tax exclusion for the returns from initial investments, you will only have to pay tax when you are taking the money out. It is not mandatory for employers to provide this plan to employees nor is it necessary.
A retirement plan or a pension plan is an investment plan. This helps you accumulate a fraction of your savings over a longer period. This corpus can be used to deal with post-retirement contingencies and to ensure continued financial stability, even in the absence of employment.
Retirement planning is a multi-step process that needs a lot of deliberation. You can start your retirement planning by figuring out when you want to retire and what you want to do after retirement. Once you figure that out it is only a matter of ensuring that you have enough funds to safeguard your retirement by the time you are ready to retire. A good way to start would be to enrol in a long-term savings scheme such as the Public Provident Fund(PPF).
You can easily calculate your retirement plan corpus using an Excel spreadsheet Future value formula. Here’s how.
Calculate the number of years left for you to retire by subtracting your expected retirement age from your current age.
Calculate your living expenses by inflating your current expenses. For this use the future value formula with an annual inflation rate set to 7%.
Calculate the present value of all your retirement years using the present value formula. This amount—the sum of the present values of your retirement years spending—is your ideal retirement corpus.
Your retirement corpus is the sum of money you should ideally have in your savings so that you can manage your expenses after you retire from work. You can easily calculate this amount by calculating your expenses across your retirement years while factoring in the rise in prices across the years.
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