Ultimate Guide To Retirement Planning In India

Planning for retirement hasn’t changed much over the years. You work, you save, and then you retire. But while mechanically, it may be the same, Our generation is facing some significant challenges that previous generations didn’t have to deal with.

First, life expectancy is longer, so you’ll need your money to last longer potentially into your 80s. Deposit yields are also much lower than they used to be, which means you can’t buy a few fixed-income instruments and earn a double-digit return. Then there is a health crisis due to various pathogens. Then there is this credit card culture where most of your savings go into repayment of readily available debt, which was not the case for the previous generation.

These things are compounded by the fact that almost all Indian companies have moved away from defined pension benefits which guaranteed you a certain amount of money in your golden years to defined contribution plans(EPF, NPS etc.) .

What is retirement planning?

Planning for retirement means preparing today for your future so that you continue to achieve all your goals and dreams. This includes setting goals, estimating the amount of money you need, and investing.

It would be best if you designed a retirement plan specifically to suit your individual needs. After all, you may have specific ideas on how you want to spend your retired life. 

Why plan for retirement?

First, you need to understand that you are retiring from work, not life. You may have a different set of plans for your post-retirement life. At the same time, you also want to maintain your lifestyle without worrying about expenses. 

By planning, you can define the path to achieving these life goals without financial dependence. 

Here is why you need retirement planning:

Rising costs/Inflation-Inflation is a vital element to consider in your retirement plan. If you cannot keep up with rising inflation, you will have to compromise on your standard of living.

Emergencies-You may not want to depend on someone in any financial or medical emergency. With proper planning, you can build an emergency fund that will prepare you for unexpected events. While retail expenses continue to increase steadily, healthcare inflation is growing at an alarming rate. While other financial goals may be passable, health cannot be compromised.

Lack of social benefits-India has yet to develop a robust social security scheme with retirement benefits for its seniors. Although pensions and employee provident funds do exist, they may not be sufficient to cover all expenses. 

Financial independence-For generations, older Indians have depended on their children for retirement support. Lately, young Indians are leading more independent lives. Often, they are unable to support their parents. Even if they can, being responsible for yourself will give you more independence to live on your terms because you will not be answerable to anyone else.

To maintain the standard of living.-You want to continue with your current lifestyle even after retirement. Today, these expenses are covered by your salary. After retirement, you need a regular income to cover your expenses.

To be prepared for longer life.-You may need a more considerable retirement corpus for your post-retirement expenses since the average life expectancy is higher today. By planning, you can make all the arrangements for a longer post-retirement income.

To fulfil retirement goals.-Retirement is a new chapter of life. It’s that beautiful part of life where you have the time to travel to new places, pick up a new hobby, or even start your venture. You may still have commitments, like sending your child abroad for higher studies. With the right retirement plan, you can cover all these.

Leave a legacy-You work hard to give a comfortable life to your family. You want to ensure this comfort lasts, even in your absence. When you plan for your retirement and build your retirement savings, you can plan to leave wealth behind for your family too.

When to start saving for retirement?

Starting early is always important – even ₹2500 a month in your 20s is good –but if you were not able to, it’s OK to first set money aside for more immediate needs like housing or a child’s education first and then start tackling retirement in your 30s and early 40s. However, you don’t want to go beyond that because you need to give time to the retirement account for that money to grow. The longer you delay, the more you’ll have to put away yearly, making the challenge a lot more difficult.

Things to keep in mind when getting started

Create a Budget– It’s better to put retirement savings as an item in your budget, just like food and housing costs, so that you can set aside those funds every month.

Set Automatic Transfers- Set up an ECS or Standing Instructions between your savings and retirement accounts, so you don’t forget to save. It may be on the day you get your salary or the next day. When you do it this way, you reduce the risk of spending that money.

Create an emergency fund- Having a separate emergency fund usually with about three to six months of salary — will allow you to cover unexpected costs without drowning your retirement corpus.

Pay down debt first- You should aspire to reach your retirement age debt-free. That includes credit card debt and especially the high-interest debt on a car and home loans, any education and other big loans as you don’t want to be going into your non-earning years owing money.

Have sufficient life and Health Cover– You don’t want to use your retirement corpus for these exigencies.

How much do you need for retirement?

The first is to think about what your life might look like after retirement. Write down your retirement goals.

Then think about how much these things will cost. We don’t know what prices will be like in the future, and in recent years inflation has been around ~ 6%, but the average inflation rate in India over the past sixty years (1960-2020) was ~7%. So plan for increasing prices in the decades ahead. You’ll also want to factor in your daily expenses, like housing, food and health care. Remember, some of the costly expenses you have now, such as home loans or child care costs, will no longer exist, which could decrease your overall expenses as you near retirement.

Experts say your retirement income should be about 70% of your final pre-retirement annual income. That means if you make ₹10,000,000 annually at retirement, you need at least ₹7,000,000 per year to have a comfortable lifestyle after leaving the workforce.

There are various ways to determine how much you need to save to get the retirement corpus you want. One formula is dividing your desired retirement annual income by 4%, known as the 4% rule.To generate the ₹7,000,000 cited above, for example, you would need a corpus at the retirement of about ₹175,000,000 (7,000,000 / 0.04). 

Experts suggest saving 15% of your gross salary starting in your 20s and lasting throughout your working life. This includes savings across various retirement accounts and all employer contributions if you have access to an EPF or another employer-sponsored plan.

Minimum savings you should have in your retirement corpus by a particular age.

Age 35-two times annual salary

Age 40-three times annual salary

Age 45-four times annual salary

Age 50-five times annual salary

Age 55-six times annual salary

Age 60-seven times annual salary

Age 65-eight times annual salary

The important thing is to stay as close to your savings goal as possible and check your progress at each step to ensure you’re staying on track.

What investment accounts should you use?

Accumulation

• Employee Provident Fund(EPF): Debt-based accumulation with annual interest credits, guaranteed not to go down.
• Small Savings Schemes: Senior Citizen savings scheme(SCSS), Public Provident Fund(PPF)
• Bank Deposits and Company Bonds: Recurring deposits, company bonds, tax-free bonds.
• Life Insurance: Savings, investment and guaranteed income plans for accumulation. 
• National Pension System(NPS) and Mutual Funds: Equity, debt, hybrid(Preferably passive mutual funds like ETF or Index Funds)
• Direct Equity(If you have time and expertise)

Income generation

• Small Savings Schemes: Post office monthly income scheme.
• Bank Fixed Deposits and Company Bonds: Interest from fixed deposits, coupons from bonds.
• Life Insurance: Regular income from guaranteed income plans, annuity for life-long pension.
• Mutual Funds: Systematic withdrawal plans (SWPs).

Conclusion:

Retirement planning is important for all Indians, regardless of their income level. By starting to save for retirement at an early age, you can ensure that you have a comfortable retirement lifestyle. The amount of money you need to save will depend on your individual circumstances, but everyone should aim to save as much as possible. If you are unsure about how to get started with retirement planning, consult with an expert who can help guide you through the process.