Retirement plans are specially designed investment plans that let you save money for your retirement in a systematic and disciplined manner. You contribute a certain sum of money to the plan on a periodic basis so that by the time you reach retirement, the plan has accumulated a considerable corpus of funds. Often, retirement plans provide the dual benefit of wealth accumulation and an insurance cover.
When you start your earnings journey, youh are inevitably full of optimism about what the future holds for you. At this juncture, planning for retirement is probably the farthest from your mind. However, as you get older, you begin to dream of a time when you can hang your boots, turn off the alarm clock, and enjoy life at leisure. This is when you might start planning for your retirement. This is also when you realise that you are already very late to the retirement party.
Here’s what you should know about planning your retirement.
How a Retirement Plan Works
A retirement plan will secure your life post retirement. For instance, say you are currently 32 years old, earn a monthly income of INR 50,000, wish to retire at 60 years, and expect to live till 80 years. The first thing that you need to do is assess the amount of money that you will require on a monthly basis during retirement. For this, you must consult a financial advisor to help you determine the following steps:
Calculate your current and expected future income, including income from investments (I)
Calculate your current expenses and estimate outflows during retirement (II)
Calculate your requirement – This is the difference between (I) and (II) and will tell you the amount of money that you require to lead a comfortable and secure retired life.
To achieve this, you need a suitable retirement plan. Based on calculations that take into consideration an expected rate of return and average inflation over time, you can start contributing a certain sum of money to a retirement plan. This is how it will work.
Accumulation phase: You can choose to either pay a lump sum amount or contribute at periodic intervals. Either way, the money contributed will grow over a period of time to accumulate into a sizable corpus. This is the accumulation phase of your retirement plan. In our example, the accumulation period would be 28 years.
Benefit from the power of compounding: The money contributed by you will be further invested to generate optimal risk-adjusted returns. It is recommended to buy a retirement plan as early as possible so that you can increase the return potential of your plan through the power of compounding.
Vesting age: This is the age from when you will start receiving your pension, that is 60 years.
Payment period: This is the period for which you will receive your pension payments post-retirement. In our example you plan to receive your pension from the age of 60 years to 80 years, your payment period will be 20 years. This is also known as the annuity phase. However, depending on the plan that you have chosen, you might be allowed a partial or full withdrawal in the accumulation phase as well.