Smart retirement planning- How much do you actually need?

Smart retirement planning- How much do you actually need?

Are you looking at creating a retirement plan for a secure and comfortable future? If yes, you should definitely figure out the amount you need to accumulate. People often make the mistake of underestimating the future corpus they have to build to comfortably live out their post-retirement years while accounting for inflation and other increasing expenditures simultaneously. Retirement planning should ideally be done in the early stages of life rather than when you are closer to retirement.

To this end, you should first use a retirement planning calculator to estimate your future needs. Irrespective of your current life stage, you should not neglect retirement planning and should systematically save up for the same in a disciplined manner.

How much do you require for a comfortable future?

As mentioned, you can use a retirement planning calculator to determine the total amount you require after retirement. You should begin with calculating the basic cost of achieving diverse life goals and the projected expenditure on living costs when you stop earning monthly income. Prioritize essential expenses over non-essentials. Many calculators can help you find the accurate figure in this regard.

For example, let’s assume that you are a 25-year-old professional with a monthly expenditure of ₹30,000. You are looking to create a retirement plan so that you can retire a bit early, let’s say at the age of 50. Furthermore, you want to have a corpus that can support you for at least 25 years after you retire. So, taking a 6% inflation rate along with an 8% rate of returns on your investments, you will need to at least accumulate around ₹1,72,00,00. This is a sizeable amount that will require a solid portfolio of diverse investments to achieve.

While planning this amount, make sure that you are adjusting your figures for future inflation. In addition, you should consider future living costs by doing your own calculations. Otherwise, you run the risk of falling short of what you require to lead a comfortable lifestyle after retiring from work. Finally, it is essential that you reassess your requirements periodically, as your monthly expenses will not always be the same, and varied financial responsibilities, may arise suddenly.

Should you choose pension plans?

Pension plans are often considered an effective retirement planning tool for the future. It is an investment strategy provided by life insurance providers to aid you in saving for retirement. The plan offers a predetermined and recurring pension, avoiding financial shortages in your retirement years. Moreover, they make a strong case for their inclusion in your portfolio due to the following reasons:

  • Building savings for the long term - You may purchase pension plans well in advance, and you can invest your money to help it accumulate into a sizable kitty over the years. You can use this amount to earn regular monthly income to meet your expenses easily.
  • Coverage for beneficiaries - Pension plans also protect your nominees and beneficiaries in case of any financial distress. Many such plans come with accompanying life insurance coverage where the sum assured/death benefit is paid out to the beneficiaries/nominees in the event of the policyholder's untimely death. This amount may also be payable in installments to the nominees at times.
  • Helps in tackling inflation- Usually, your accumulated money's value will come down yearly. Inflation leads to a drop in monetary values, i.e., your costs will increase, and your purchasing power will also decrease accordingly for similar amounts. Suppose inflation continues unabated for two or three decades. What is going to happen then? A pension plan will help you invest in a disciplined manner where you can outstrip inflation accordingly.
  • Tax Deductions- Pension plans come with accompanying tax benefits for policyholders. You can get tax benefits up to Rs. 1,50,000 under Section 80CCC of the 1961 Income Tax Act on the premiums you pay for these plans. After retirement, you can take up to 1/3rd of the accumulated corpus without paying any tax on it, as per Section 10 (10A). Before investing your money, you should always consult a financial advisor regarding tax benefits.
  • Compounding benefits- Compounding naturally takes place when investments start earning income/returns, and these are further invested to earn more returns as well. If you stay invested for 10, 20, or even 30 years, then you will benefit significantly from the power of compounding. This will help you amass a sizable corpus that will keep you comfortable throughout your retirement.

These are some of the pertinent factors that make pension plans value-additions to your portfolio, no matter your age and current life scenario.

What is the type of payout option that you should consider?

Pension plans usually have two payout options. Once you invest over a long period and accumulate your retirement kitty, you can either choose to withdraw the entire amount as a lump sum amount. You can then invest this amount to get a monthly income. At the same time, many people choose to get a part of the corpus as a lump sum payment while allocating the same to get monthly income from the same. Some choose to distribute the entire amount as a monthly payout or income source throughout their lifetime.

Do your homework before choosing any pension plan and compare options across multiple insurers to make the best possible choice.

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