A typical retirement plan in India has been the younger generation looking after their elders post retirement for decades. With a change in lifestyle, the urgency and the need to create a robust retirement plan for all individuals has arisen and your insurance policy could help you build that corpus.
By 2050, the number of people above sixty years of age will be significantly higher than the number of people below fifteen years of age in India. This implies that social security and servicing senior citizens’ needs should assume prominence today to cater to the population thirty years from now.
Let’s look at how you can make your retirement planning more meticulous.
What Makes Retirement Planning Essential?
There are 4 key dynamics that should prompt everyone to think about retirement planning to become financially independent:
- 60 is the New 40
Gone are the days when the word death was a part of the lexicon when you turned 60. Improvement in medical science has increased the average life expectancy in India from 49.7 years in 1970-75 to 68.7 years in 2012-16. However, while life has increased, work-life has not. If retirement is not planned well, you could risk outliving your savings.
- Medical inflation
Do you remember the price of a thermometer 30 years ago? Maybe not, but you sure must anticipate and plan for a thermometer’s price 30 years hence. The point is that inflation in the health area – prevention, diagnostics and treatment – will all rise exponentially.
Several studies have pegged India’s medical inflation in the year 2019 in the range of 7% to 9%. The pandemic and the cost involved for prevention and cure is a latest example. Additionally, with advancing age, the medical expenses will also keep on increasing.
- Reduce dependencies
It is important to recognise that India is undergoing a transformation in its socio-economic fabric. Earlier children took care of the elders due to the prevalent incidence of joint family systems, common income source (family-owned business), etc. Today, individuals are increasingly yearning for a retirement period where they do not need to depend on family members for basic necessities.
- Desire to pursue passion projects in retirement
Retirement is a harbinger of new beginnings. It is no longer about hanging up your boots. Apart from leading a comfortable life and indulging grandchildren, you might also want to pick up new hobbies, travel and give back to society, for example through charity.
In such a scenario, the astute need for retirement planning becomes pertinent very early in life. It can begin with 4 basic steps.
Steps for Retirement Planning
- Determine current and future expenses
Chalk out the current and future needs and determine the associated expenses. Remember, the need for medical assistance increases as we age. So, total healthcare expenditure as a percentage of total income will increase, precipitating the need to set aside an amount of money towards medical expenses.
- Assess current and future income
Ascertain the amount of money that can be allocated from the current incomes towards retirement planning. Additionally, consider future resources like income from part-time employment.
- Evaluate assets and current investments
Evaluate the current investment portfolio and determine the potential income that it can generate during the retirement years.
- Arrive at the retirement ‘need’ gap
This is the difference between the amount of money required to lead a comfortable retired life and the amount of money currently available to meet this need. The retirement need gap gives a clearer purpose to retirement planning by creating a measurable goal.
Calculating an Ideal Retirement Investment Plan
Have you thought of how much income is required to live the ideal retired life? The basic rule of thumb is that post retirement, to maintain a similar lifestyle, you would require 70% to 80% of the pre-retirement money. For example, if your monthly expenses are INR 1,00,000, then you may require INR 70,000-80,000 per month when you retire.
- Your retirement planning, with clear and measurable goals, should ideally start as soon as you begin your earnings journey.
- Start by investing a small proportion of your total savings to retirements.
- This proportion can grow as you age and meet your short-term and long-term financial goals and familial responsibilities.
The chart below shows an indicative allocation to savings.
The Best Laid Plans
It is important to create a well-diversified portfolio that is spread across several asset classes and instruments including equity, debt, and insurance, which facilitate wealth creation and savings.
For the short and medium-term, you can opt for bank fixed deposits and mutual funds. For the long term, there is the National Pension Scheme and life insurance.
Key Benefits of Life Insurance as a Retirement Tool
Life insurance offers benefits such as stability and protection, regular and guaranteed income during the retirement years and also, flexibility with facilities like top-ups.
The key benefits of using life insurance to build your retirement plan include:
- Long-term Product
Insurance is a long-term product that guarantees benefits for 25-30 years. It is the only instrument in your financial portfolio that provides for assured benefits and regular investments as insurance companies absorb the reinvestment risk in the long term.
- Inculcates Financial Discipline
Insurance inculcates financial discipline as it allows for regular investment. While everyone wants to secure their retirement phase, not everyone has the discipline to save.
- Suitable for Low Risk
Insurance is an ideal retirement planning instrument for individuals with low risk appetite and those who seek assured income. There are several options that provide either minimum guaranteed amounts plus bonus or a fully guaranteed amount.
- Versatility to Invest in the Stock Markets
Individuals with higher risk appetite can opt for market-linked plans such as unit linked insurance plans or ULIPs. These allow for savings in the earning phase and withdrawals in the non-earning or retirement phase.
Many insurance plans offer income options in non-earning years, such as ULIPs available till age 90 with withdrawals or whole life plans with money back built in or income plans where there is tax free income payable.
Ways To Use Your Life Insurance For Retirement
You must plan for two life stages. One where you earn and save for retirement, i.e., the accumulation phase and one where you earn an income from the accumulated wealth.
Saving for Retirement or Accumulation Phase
- If you are looking at insurance coverage for life along with survival and maturity benefits, you can opt for whole life plans.
- In case you have a lower risk appetite and are looking for defined assurance and tax benefits, you can opt for endowment plans that provide either minimum guaranteed amounts and bonus (participating endowment plans) or a fully-guaranteed amount (non-participating endowment plans).
- If you stand on the higher quadrant of the risk and return matrix, you can invest in ULIPs. These market linked plans let you save towards retirement while allowing you the luxury of drawing down, tax free for planned expenses, such as higher education for children, marriage expenses etc.
Phase Where You Utilise the Funds for Income During Retirement
Once you are a retired individual, you can reap benefits from the corpus that has been accumulated during the savings phase. This is where you actually earn regular income so that your retirement years are as smooth as you want them to be. One product in this bucket is the annuity product.
Annuity Plans
Annuities are specifically designed by insurance companies to provide you guaranteed income during the retirement period. Since an annuity plan is for life, it protects you from outliving your savings. Few attractive variants include:
- Return of purchase price on death of policy holder to the nominee
- Joint life annuity wherein the spouse continues receiving income after the primary policy holder passes away.
- You have the option of investing in an annuity with your retirement savings. This is called immediate annuity where you can receive the pension within one year of the premium amount being paid.
- You can opt for a hybrid mode, which is an accumulation and income plan that allows for savings in earning years and income in non-earning years. The insured can indicate the periodicity over which they would prefer to receive the annuity from the insurance company.
- Individuals who still have some years to retirement can choose these deferred annuity plans.
Bottom Line
Every individual must leverage insurance for retirement. This trifecta of assured benefits and a comfortable retired life, financial stability that comes with disciplined and regular investments, and protection make life insurance one of the most compelling instruments for creating a robust retirement investment plan.
