Simplifying Life Insurance in India
How to Invest in Retirement Plans for a Secure Future?
Planning for the post-retirement life should be on everyone’s financial goal planning list, as becoming financially independent will allow you to live a worry-free retirement life.
You need to save and invest to build a substantial retirement corpus that can take care of all your daily needs, medical emergencies and fulfil your dreams like travelling, pursuing a hobby, starting a new venture, etc.
Waiting to celebrate your retirement and then thinking of saving can prove a poor life decision; thus, retirement investment planning from an early age is highly encouraged to have peace of mind during the golden years of your life.
Let’s read about everything you need to know about retirement and pension plans.
What are Retirement Investment Plans?
Retirement pension schemes are schemes that help individuals maintain a financially secure post-retirement life when they no longer have a steady income.
Individuals can accumulate enough funds over time by investing in these retirement pension plans as a lump sum or as regular premium payments. This retirement corpus fund allows retirees to have a steady income stream, save taxes and beat inflation.
The working of retirement pension plans in India includes investing in the fund for a determined period and then, on maturity, purchasing the deferred annuity or immediate annuity. The annuitants have the option to commute some part as lumpsum payout in deferred annuity plans or to receive monthly pension benefits.
What are the Different Types of Retirement Investment Plans?
1. Retirement Pension Plans
These types of plans ensure a steady income once you retire, and you can systematically save money over the years. Moreover, a pension plan also helps you beat inflation without compromising your standard of living.2. Retirement Annuity Plans
In an annuity plan, the policyholder either receives lumpsum or regular payouts for the rest of their life. The policyholder deposits money in the plan during the policy's accumulation phase. The life insurance company then invests this money and pays the returns generated from it to the policyholder.What are the Benefits of Retirement Pension Plans?
1. Financial Independence
One of the main benefits of investing in retirement plans is that you enjoy financial independence in the golden years of your life, and you do not have to rely on your children financially. It allows you to fulfil your dreams after retirement and offers peace of mind.2. Guaranteed Regular Income
By investing in retirement plans, you are guaranteed a steady income at a time when you no longer work. Such a benefit lets you have peace of mind as you head into the golden years of life and meet life's demands.3. Security for Your Family
Most pension plans offer death benefits, meaning that the nominee will get the sum assured or death benefit in case of the policyholder's untimely death. Also, in case you and your spouse are not there, your children will receive the policy benefits, thereby ensuring your family's financial security in your absence.4. Emergency Fund
When you no longer have a steady job, unforeseen events like medical emergencies can hit you much harder. Investing in retirement plans prepares you for such situations, as you can secure a sizeable retirement corpus.5. Beat Inflation
As inflation increases over the years, it gets more and more expensive to maintain your lifestyle. The cost-of-living increases while the value of money falls. So, the best solution to deal with inflation without compromising your financial expectations upon retiring is planning for retirement early on.6. Tax Benefits
Senior citizens can save on their taxes by investing in various schemes, which enables them to save significantly on income tax under Sections 80CCC and Section 10(10A) as per the prevailing tax laws.7. Grow Money
Several retirement plans help you save and grow your money over the years. Saving enough helps build a retirement corpus while growing money simultaneously enables you to beat inflation and deal with financial emergencies.8. Choice of Early Retirement
The ultra-modern stressful lifestyle has started taking a toll on people nowadays, and you may want to enjoy the retirement phase before a certain age. To achieve this goal, you must start investing in retirement plans now.Who Should Buy Retirement Plans?
Young Professionals
Young working individuals have the maximum advantage here as having a regular income enables them to invest more. Therefore, they can build up a significant retirement corpus as they have more time and capability to take more risks for higher returns.
Read more: Retirement Planning in your 20s
Newly Married Couples
Newlyweds must deal with increased financial and family responsibilities, encouraging them to plan for their future when they no longer have to work. Both partners can chart out their future and invest in retirement plans accordingly.
Read more:
Parents in their 50s
Upon becoming parents, individuals should soon start saving and investing for their financial independence after they retire, as nobody wants to depend on their children in a financial emergency.
Read more: Retirement Planning in your 50s
Senior Citizens
Early retirees and people in their mid-60s should immediately organise their finances and invest in retirement plans to ensure financial independence and stay prepared for health emergencies.
Read more: Retirement Planning in your 60s
How Much Do You Need to Save for Retirement?
In your post-retirement phase, the inflow of steady income stops, so you must ensure that you have enough funds to last for years and can take care of your daily and medical expenses.
Hence, it would be best to calculate all your financial liabilities for your post-retirement life well in advance. Here’s what all you need to consider for getting an estimate of the required amount:
- Your daily expenses to maintain your current lifestyle.
- Your financial responsibilities during retirement, like paying for your children’s higher education, wedding, etc.
- Your post-retirement hobbies and dreams, including travelling, starting your venture, indulging in a new hobby class, etc.
- Any medical emergencies and other unforeseen costs.
- Your retirement fund must offer returns that beat inflation, or the purchasing power of your money will deteriorate.
Why Should You Start Planning Your Retirement Investment Early?
Power of Compounding
By investing early in retirement pension plans, you can leverage the power of compound interest over the years and significantly boost your retirement savings.Inflation
Inflation reduces the purchasing power of your money over time. So, the only way to beat inflation and fulfil the financial expectations when you retire is by planning for retirement early.Better Options and Flexibility
Planning for retirement now will provide you with more and better plan options, like long-term investment instruments generally offering higher returns over time. You also benefit from increased flexibility in choosing your desired investment options.Unexpected Events
Unpredictable and unforeseen events can happen to anybody, such as medical emergencies or job loss, impacting your retirement plans. If you start early, you can build an emergency fund to handle unexpected expenses.What Factors to Consider for Buying Retirement Plans?
1. Your Budget
You know your expenses best, as well as any financial liabilities planned. Therefore, you must consider your budget for investing in pension plans, keeping in mind the increasing inflation rate as well.2. Income Sources
While you may not have a regular stream of income anymore, you may have other earning sources, such as rental income or pension for government employees. So, consider all your income sources before retirement planning.3. Debts
You may have loans to pay off or other outstanding debts that you do not want to take with you in your post-retirement life. So, as your retirement approaches, plan to pay off your debts as soon as possible.4. Risk Tolerance
Before retirement investment planning, it’s essential to assess your risk appetite. Later, you do not want to regret losing your hard-earned money by investing in a higher-risk plan because you weren’t aware.5. Period Before Retirement
Analyse how many years before your expected retirement age you want to invest in retirement plans, as this will determine your fund amount later. So, give yourself enough time to accumulate your retirement corpus.6. Inflation
Over the years, inflation rises, increasing the cost of goods and services and reducing your money's purchasing power. Therefore, you need to plan for a larger retirement fund that can ensure the same standards of living as now but with increased inflation.How to Choose the Best Retirement Scheme?
Choosing the retirement scheme that best suits your needs is extremely important as your finances post-retirement depend on the plan’s returns.
So, follow these valuable tips to choose among the best retirement plans in India:
Investment Amount
Different retirement pension plans have varying maximum and minimum investment limits. So, choose the plan that is in your budget.Returns from Plan
The most important feature to look for in a retirement pension plan is the potential return it offers. Some plans provide assured returns but at a lower rate of return, while some plans with higher rate of return may not offer guaranteed returns. So, choose a plan that suits your goals and pays off better.Risk Involved
Retirees generally have significantly lower risk appetite, so it's better to choose a retirement pension scheme that offers guaranteed returns and is not market-based. This will ensure your peace of mind and help you fulfil all your retirement goals without risk.Liquidity
Flexibility
You may have set some retirement milestones you wish to achieve, but they can change over the years. This may require you to increase or decrease your retirement fund amount. So, look for a pension plan that offers the option to change your premium amount and frequency.Steps to Buy a Retirement Plan
To buy a retirement pension scheme that best suits your needs, follow the given steps:
- Step 1: Determine your retirement goals based on your living standards, medical issues, and other financial obligations.
- Step 2: Calculate the amount you will need to meet your goals during your retirement.
- Step 3: Compare and choose different retirement pension plans based on their features, benefits offered, cost, and payout structures.
- Step 4: Read the plan’s terms and conditions thoroughly, including vesting period, withdrawal restrictions, fees, and any hidden charges.
- Step 5: Now, submit the required documents like identity and address proof, income proof, etc., to buy the pension plan. Also, remember to regularly monitor your plan's performance and stay updated about any changes.
Which are the Best Retirement Plans in India?
To ensure financial independence during your post-retirement phase, you have the following financial instruments and schemes to choose from.
| Retirement Pension Schemes | Details |
| Public Provident Fund (PPF) | It is a 15-year government-backed retirement scheme that can be extended indefinitely and offers attractive, risk-free returns. One can start investing with only ₹500. All taxpayers, except HUF and NRI, can invest in PPF. |
| National Pension Scheme (NPS) |
|
| Employees Provident Fund (EPF) | Salaried people and their employers contribute a fixed percentage to EPF every month till the employee leaves the organisation. After retirement, one continues to earn interest on the deposit if the member has not withdrawn. |
| Atal Pension Yojana (APY) | This retirement scheme guarantees a minimum monthly pension of ₹1000, ₹2000, ₹ 3000, ₹4000, or ₹5000 to poor, underprivileged, and unorganized sector workers who reach the age of 60 and have subscribed to this scheme. Upon the policyholder’s death, the nominee will receive the policyholder’s pension corpus, accumulated till the age of 60 of the policyholder. |
| Senior Citizens’ Saving Scheme (SCSS) | SCSS is a 5-year pension plan available only for senior citizens, which can be extended for an additional three years. The scheme offers the highest post-tax returns among the other fixed-income tax products. |
| Life Insurance Investment Plans | Unit-Linked Pension Plans (ULIP) are specifically designed for those looking for retirement pension plans. Upon retiring, they can withdraw one-third of the accumulated amount, tax-free. The balance must be used to buy an annuity plan, offering a regular but taxable pension. |
| Mutual Funds | These are riskier private investment instruments and offer returns depending on market volatility. For long-term retirement investment planning, you can invest in high-risk equity funds and low-risk debt funds, depending on your risk appetite. |
| Tax Free Bonds | Their maturity period ranges from 10 to 20 years and offers attractive returns. People looking for a regular income during retirement should prefer this option. |
| Bank Deposits | This is a trusted and traditional investment instrument that helps save surplus funds. You can invest in a Recurring Deposit (RD) or a Fixed Deposit (FD). Both plans are risk-averse and offer guaranteed returns. FDs offer attractive return rates and allow you to accumulate a significant amount by the time you retire. |
Important Terms Related to Retirement Pension Plans
- Accumulation Period: The complete plan duration during which an investor pays regular premiums.
- Annuity: It is a fixed amount received by the investor each year throughout their life tenure. Annuity can be immediate or deferred based on the plan.
- Payment Period: It is the period post-retirement when the investor begins receiving payments.
- Sum Assured: It is a definite amount, generally ten times the annual premium or the policy’s fund value, which is given to the nominee at the end of the plan tenure.
- Surrender Value: It is the amount that the insurance company pays the policyholder if they surrender the plan before it matures.
- Vesting Age: It is the age at which a policyholder starts receiving their pension.
FAQs about Retirement Investment Plans
When should I start retirement planning?
What does vesting date mean?
Can I have multiple retirement pension plans?
Are there any tax benefits on retirement investment plans?
What happens to the retirement pension plans after the policyholder’s death?
Other Important Articles Related to Retirement & Pension Plans
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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