Financial Planning for Retirement

12 min readJun 17, 2022

“Turning 60 years old is an uncertain time for most private sector employees. Once they retire, the monthly salary says bye-bye. Retirement is about finally getting time, but it also marks a phase when your expenses have to be funded by savings. Government sector employees have pension, but private sector employees do not. Let me tell you how to prepare for a happy, peaceful and independent retired life.”

Retirement Planning

Everything that has a plan is assured of an outcome. Planning is important. Be it a 30 year old or a 50 year old person, retirement is a definite event that will happen. The earlier you prepare, the better it will be. At its core, what is retirement planning? It is all about ensuring that after retirement, you can take care of your expenses through a regular stream of money. Yes, retirement planning involves disciplined saving. Then, you need to do vigilant investments for building a sufficient retirement corpus. Lastly, there must be a judicious drawdown in the post-retirement phase since indiscriminate withdrawals can lead to the precious retirement money getting over too soon.
The best way to achieve all this is by joining a pension/retirement plan at an early stage in one’s life. As you work and save, your retirement corpus too rises. The day the person retires from active work life, he/she gets a regular stream of income in the form of pension for life.
You may have successfully gone through the many phases of life. This would have involved overcoming many hurdles in your long career and life path. There have been many ups and downs but, retirement is a big challenge. Why? In all the previous challenges, you had income on your side. You knew you had the ability to earn money but retirement is all about living without any salary.
For salaried people, this requires great mental adjustment. But retirement is not an end. It is merely changing the speed of your car from the fast lane to the slower lane. It is another phase in one’s life. There are a few unique things in this phase. For instance, retired people are older so healthcare expenses are higher. But older people do not spend much time eating outside and partying, so entertainment expenses are lower.

Preparing For Salary Loss

No matter how you look at it, some sadness always descends the day you get your last salary. You know from next month there will be no salary. But, the beauty of the situation is that you know for many years that this day will come. Planning for unexpected things is much more difficult. Planning for expected events is relatively simpler. For most people, regular income comes in the form of a monthly salary. Because of the regularity of income during our working life, individuals usually adapt their spending with income.
For instance, if somebody earns ₹ 75,000 per month, their expenses will always be near that figure. This is how our budgets work. This happens for months, years and decades. Then, retirement arrives. The habits stay. The lifestyle has become an integral part of your life. This is why at some time before retirement, we need to have a proper plan about what we are going to do with retirement savings. The plan cannot happen when you hit retirement.
The entire plan is to replace pre-retirement salary with post-retirement income. Here are four simple steps that can help you arrive at an ideal retirement plan.

Step 1 — You need to calculate how much money you require to lead a comfortable life in your post-retirement year. Account for aspects like increased medical/health costs.

Step 2 — Have a very clear idea of any amount to be received in a lump sum at the time of retirement like EPF money.

Step 3 — Choose the right retirement plan that enables you to meet your post-retirement expenses. Combine all the available options so that you have a diversified basket, cutting down reliance on one or two options.

Step 4 — Start investing early in the retirement so that you have time on your side. It will allow you to enjoy the power of compounding.

How much money is enough post retirement?

One of the most important tasks in retirement planning is to calculate how much money you require. This calculation may seem tough given that retirement may be 20–30 years away for a young person. However, you still need a number. That will be your goal. An easy rule of thumb to know how much is enough is to assume that you’ll need to replace 70% to 90% of your pre-retirement income. So, if you’re earning ₹ 50,000 a month (before paying taxes), you might need ₹ 35,000 to ₹ 45,000 a month in retirement income. This would, theoretically, let you enjoy the same standard of living you had before retirement.

The following example tells you in greater detail how you can arrive at the targeted amount needed as retirement corpus.

Retirement Age — 60 years
Current Age — 58 years
Life expectancy — Till 85 years
Years after retirement — 25 years
Current Annual Expenses — ₹ 2.04 lakh
Average Return on investment — 12% per annum
Inflation per annum — 5%
Inflation adjusted investment return — 7%
Total retirement corpus required — ₹ 17 lakh

How to Prepare for Retirement?

Leading a financially independent and happy retirement is not an impossible task. In fact, many around you are doing it. Many more will do it in the future. The blueprint of a retirement financial plan needs to have 6 important steps:

1. It is never too late to start — A retirement plan is only too late if you never start at all. So, start today.

2. Deposit a large portion of everything you can into your retirement plan — This will act like a seed for the retirement tree.

3. You cannot spend your way to post-retirement bliss — This means you need to reduce expenses and funnel those savings into your retirement kitty.

4. While you aim for higher returns and tax savings with retirement savings, do not invest in anything you are not comfortable with.

5. Make your goals realistic — Make the mental adjustments required to have an affordable lifestyle in retirement.

6. Sell financial assets that are not producing income or growth — Focus and invest in income-producing assets.

Financial planning is the process of meeting your financial goals. This can happen 50% through the proper management of your finances and 50% through execution of your plans. Make advance provision for your anticipated financial needs that will arise in the future. The entire game is having the right amount of money at the right point in time in the future.

Different Options for a Retirement Plan

Let us discuss some of the useful retirement corpus building options. Each of these can be used to create a retirement corpus that can fund your post-retirement life. Ideally, one should use a combination of them.

National Pension System — Known as NPS, this system is administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA). The NPS is a voluntary, defined contribution retirement savings scheme. It is designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life.
Employee’s Provident Fund — Many salaried professionals see a portion of their salary going to EPF each month. The money goes into Employee’s Provident Fund. EPF is a retirement benefit scheme which is available to all salaried employees. EPF is looked after and maintained by the Employees Provident Fund Organisation of India (EPFO). From the day you start working, you as well as your employer start contributing 12% each of your basic salary into your EPF account. The money from different EPF subscribers like you are pooled together and invested by a trust. This pool generates interest income. The rate of EPF is determined by the government and the central board of trustees. The compound interest that is determined by the government and central board of trustees is paid on the amount which is credited to the employee. This is done as on the 1st of April every year. Your contribution is eligible for getting you a deduction of up to ₹ 1.5 lakh under Section 80C of the Income Tax Act. The money that you accumulate in your EPF i.e. the interest earned and the money that you will withdraw after the mandatory specified period (5 years), all are exempt from Income Tax.
Public Provident Fund — This is a popular long term investment option backed by Government of India. It offers safety with attractive interest rate and returns that are fully exempted from Tax. Investors can invest minimum ₹ 500 to maximum ₹ 1,50,000 in one financial year and can get the facilities such as loan, withdrawal and extension of account.
Mutual Funds — There are special type of mutual funds that are suited for retirement. Such MFs fall in the solution-oriented schemes category. These retirement funds invest up to 40% in equities and the balance in fixed income. The come with 5-year mandatory lock-in.
Insurance retirement plans — These are retirement plans with a foundation in insurance. They require you to make contributions into a pool of funds set aside for your retirement benefit in the future. During the investment stage, insurance retirement plans can put your money in a range of assets like equity, debt etc., in a bid to generate returns so that the corpus is bigger. During the investment phase, you can get tax benefits under Section 80C. During maturity stage as well, corpus will be tax-free. However, income in the form of annuity is not tax-free. Do remember a retirement insurance plan also comes with financial protection in the form of a life cover. This facility is missing in all other retirement options. If you meet premature death, your loved ones’ will get a life cover sum that should help the family survive. If you survive until retirement age, the regular investments by you would ensure a big enough corpus any which way. Do remember that an annuity plan is a type of insurance which starts paying you an income right from the start as per the option chosen by you. Pension/retirement insurance plans will most likely have an annuity linkage at maturity stage. Usually, the annuity is given to the life assured for certain periods like 5, 10, 15 or 20 years. In life annuity option, the pension amount will be paid to the annuitant until his/her death.
Senior Citizen Savings Scheme (SCSS) — This is a bank deposit option primarily for the senior citizens of India. The scheme offers a regular stream of income with the highest safety and tax saving benefits. It is an apt choice of investment for those over 60 years of age, who do not want any market-linked return but prioritize safety of return over anything else. Investing in SCSS is an effective and long-term saving option. It offers security and added features that are usually associated with any government-sponsored savings scheme. SCSS is available through many banks and post offices across India. Senior citizens of India aged 60 years or above can use the retirement corpus to get a pension type income through SCSS. An individual can invest a maximum amount of ₹ 15 lakh, individually or jointly in an SCSS account. The amount invested in the scheme cannot exceed the money that has been received on retirement. Hence, the individual can invest either ₹ 15 lakh or the amount received as a retirement benefit, whichever is lower. SCSS return/interest is generally higher than bank savings or bank FD account. Tax deduction of up to ₹ 1.5 lakh can be claimed under Section 80C of the Indian Tax Act, 1961. However, interest is taxable. The tenure of SCSS investment scheme is flexible with an average tenure of 5 years which can be extended up to 3 additional years.
Pradhan Mantri Vaya Vandana Yojana — The aim of the scheme is to give senior citizens a form of regular pension. The scheme can be purchased from LIC in offline mode at its branches, and in online mode. The scheme provides an assured rate of return per annum. The scheme can be purchased by paying lump sum amount ranging from ₹ 1.5 lakh to maximum ₹ 15 lakh for monthly pension. The many benefits of Pradhan Mantri Vaya Vandana Yojana include no maximum entry age, provision of assured pension, maturity benefit of return of purchase price, premature exit is allowed and 98% of purchase price is given back, and payment of pension directly to beneficiary bank account. Do remember that there is no special tax benefit from section 80C. Pension income remains taxable. The Pradhan Mantri Vaya Vandana Yojana allows senior citizens to have a systematic regular pension.
Share Dividend income — This is a traditional way of generating a regular stream of income. Compared to other options, this is slightly riskier given that dividends declared by a company, however big or strong it be, does not come with a guarantee. Dividends can stop. Dividend income can be generated annually or half-yearly depending on the company that declares the dividend. Typically, PSU, foreign firms in India and old private sector organizations declare regular dividends. To generate a good regular income from dividends, one needs to build a sizeable portfolio of stocks. This cannot be done overnight. It will take time and practice to prepare a portfolio of dividend paying stocks.
Reverse Mortgage — Reverse mortgage is a relatively new way of financing against real estate. It is useful as a retirement planning tool. A reverse mortgage enables a senior citizen to receive a regular stream of income from a lender (a bank or a financial institution) against the mortgage of his/her home. The borrower (i.e. the individual pledging the property) continues to own the property and is allowed to reside in the property, till the end of his/her life and receives a periodic payment on it. The borrower is not expected to service the loan during his lifetime. Upon the death, the house goes to the lender. Resident Indian senior citizens are given reverse mortgage loans for a tenure depending on the age of borrowers. While calculating the reverse mortgage amount, the lender factors in your age, the value of your property, current interest rates and the specific plan chosen. Also the residual life of the property should be at least 20 years. The valuation of the mortgaged property is done at periodic intervals by the lender. Currently, big nationalized banks and some private banks offer reverse mortgage loans. Like any other loan, reverse mortgage also attracts charges such as a processing fee. There are two variations of reverse mortgage loans — the regular version and the reverse mortgage loan-enabled annuity (RMLeA), which is like a pension product that pays a fixed amount for a lifetime.

Final Thoughts on Retirement Income

With rising life expectancy in India, post-retirement life span is and will now be longer than what it was. Living longer is good, if you have resources i.e money. But even if you have money, annual price rise or inflation of 5% can make a dent into retirement kitty.

Plan for medical insurance — Large expenses like medical contingencies, which have more inflation, need to be accounted for. Do not repeat the mistake of many who plan retirement without any medical insurance. With health costs rising fast, recognize this risk and get it covered. In its absence, a larger pool of funds will have to be kept aside for medical emergencies in the post-retirement.
Traditional and modern mix — Among traditional investment choices for senior citizens, there are bank fixed deposits, Senior Citizen Savings Scheme (SCSS) and National Savings Certificate (NSC). Interest rates on these are safe and do not show sharp swings. Yet, retirement corpus should not be just traditional avenue focused. Consider investing in stocks, MFs, insurance plans and pension schemes from the government like NPS. They will give better returns for more risk, enhancing your corpus or helping you reach goals faster.
Physical assets — Many individuals buy fixed assets like flat or land for post-retirement purpose. Yes, traditionally, most Indian families invest in a house. But, houses/homes are not really dependable in terms of generating a fixed pension-like payment. You can take a reverse mortgage on the house, but factors like low payout, lack of understanding and complex processes are dampeners. Do not make real estate the focal point of your retirement planning. Similarly, gold cannot be your post-retirement saviour. Build a judicious mix of fixed-return and market-linked products to grow your existing savings pile and boost wealth.

Important Points to remember

Never too late to prepare post-retirement income.
Save a lot, but ensure investments.
Go for a diversified approach where traditional and modern investment avenues are mixed.
Don’t rely on real estate and gold for post-retirement income.
Explore reverse mortgage loans to get retirement income from your home/house.
Account for general inflation and medical inflation when calculating how much is enough for a happy retirement.
Pay attention to the taxation aspect when generating regular income post-retirement.
Stocks generate higher returns that beat inflation; lower risk by investing for the long-term.

Thanks for reading the Article

Originally published at https://www.yourcaguide.com on June 17, 2022.