How to Select the Right Product for Retirement

Any human being likes to live a happy life. Our goals change as per our situations and income levels. Each one of us has different life goals as well as financial goals. It is very important to have a clear picture of what you want to do in a lifetime. And a lot depends upon how much you earn, save and invest for the successful accomplishment of the plans that you make. Many of us have common goals like pursuing education from a good institution, finding the right kind of job, starting a family, owning a house, buying a car and so on. 

This is true regardless of age. There are people around us belonging to different age groups. For example, Shyam, a 15-year-old, wants to become a pilot and has started preparing for it. Anusha, a 27-year-old IT professional, thinks about changing her job for better prospects. Similarly, Animesh, a 55-year-old, has finally paid off his housing loan dues and is relaxed that it happened before his retirement. 

As we move on and get older, financial responsibilities also grow. Education of our children, repaying loans etc. become top priorities. Along with many other objectives, retirement planning is an important objective affecting an individual’s financial planning. It is as important as any other life goal. Many do not realise this fact or realise it only when it’s late. You earn till 60 but while you are earning, you should give a thought about the rest of the years of your life as well. 

How will you plan? How much will you save for your retirement? Where will you invest? Well, there are many options available, but all you need to do is pick up something wisely to make your future financially safe. Creating the retirement corpus is a process and calls for a neatly laid out framework to achieve it. 

In this article, we are going to study various aspects related to retirement with the aim to select the right product for retirement corpus. 

Why is there the need to plan for retirement?

First of all, why should an individual need to plan for retirement? The answer is regardless of your education, the position you hold in your organization or business, or wealth, you should do retirement planning. You retire only once, but it comes with many concerns that you might not be even aware of. Here are a few more reasons that put emphasis on retirement planning.  

• India is an unpensioned country. Private sector employees do not have any pension programme to secure their retired life. Similarly, self-employed people and business owners have to make sure that they secure their retirement life. Saving for retirement is a basic necessity and if left out can create troubles later in life. As per a recent survey, almost 62% of people earning in the range of Rs. 50,000-Rs.75000 have a retirement plan. Those who do not have a government pension must think about investing to save for retirement properly. 
• Life expectancy has increased over time and it is quite likely that you will survive for a period of 10-25 years or even more after you stop earning. As the stress that you faced while working no longer exists, this may help you live a longer life. 
• Deteriorating health at an older age means you need to take care of your body. Medications and other treatments are expensive and they are over and above your routine monthly expenses. 
• Tax effects on the accumulated retirement corpus must be known so that the ultimate outcome of your efforts is not eaten up. You should choose the schemes that allow tax benefits on maturity. 
• Once you realise how much money it can take to live a life keeping a similar lifestyle in future, you might even come to know that your current job, savings or investment strategy are not in line with that. You have the time now to change any of them to suit your retirement goals. The inflation factor should also be taken into account. 
• If you have planned well, you will not hesitate to leave your job a little earlier than expected. You will be able to live a better life with your spouse, without bothering your kids. Retirement planning can save you from several problems that you may not be able to think of right now. To be able to take care of all your needs even during your golden years is something. Not running out of money can make you feel confident and contended. 

The features of an ideal retirement plan

1. Start early: If you want to get the fullest benefit of any retirement scheme, you should start investing as soon as possible. Even those who have just begun earning must take this seriously and set aside money for a secured future. You have the option to increase the contribution once your income increases. 
2. PPF is not sufficient: The traditional mindset does not serve the purpose. PPF is not the only solution to take care of your retirement. It is not enough to pay your bills and address other issues like escalated health expenses. Think about other avenues that offer you better opportunities to create wealth like bonds, mutual funds, equities etc. PPF does not offer inflation-adjusted returns. What you get paid later will not be sufficient to absorb the effects of inflation at that time. A return of say 9% on PPF will just leave a margin of 3% if the inflation is as high as 6%. What you expected to earn gets eaten by the effects of inflation. 
3. Adequacy of the retirement plan: The retirement plan must ensure adequate income by way of pension. You have to look after your expenses while you are alive, and it should give financial cover to your survivors after your death. 
4. Do not just stick to fixed income generating plans: Equities earn better over a period of time. If you choose fixed income-generating products like fixed deposits or property, the value of your portfolio might take longer to create a good corpus amount. Equities should be included in your portfolio let be it any form like equity mutual funds, stocks or unit-linked pension plans.
5. Diversification is a must: All types of products such as fixed deposits, gold, equities and bonds should be part of your retirement plan. Because when you divert your funds into a particular kind of asset, you miss the benefits of other options. The same rule applies to disadvantages that any investment option comes with. Diversification can help you balance the risk and optimise your returns. Giving more weightage to a single product is not advisable. Take the risk factor into account so that market volatility does not affect the financial security that you need. Reorganize the portfolio from time to time to streamline your monetary goals. 
6. Vesting Period: It takes some time for your investments to fetch you good returns. You should pay attention to the vesting period. For example, you may require a regular income after 58 or 60 once you retire from your job, but you look out for a retirement investment plan only after 45. You get 15 years to accumulate the corpus. A few start thinking about it very late, almost when they are nearing retirement age. That way your needs may not be met by the income generated through such plans. 
7. Taxes and other Expenses: The annuity plan chosen may provide you complete tax exemption or it may be chargeable to tax either fully or partially. You need to check it beforehand so that by the time the annuity amount is received, to have a clear cut idea of what you get. You can either select the options that give you tax exemption on the full amount or invest more for additional income which is wiped off by taxes. Expenses paid to invest should not be more otherwise, they too take away a part of your benefits. 
8. Approach a financial advisor: Retirement planning is not easy and taking the help of a financial advisor is advisable if difficulties are faced while selecting a retirement scheme. They not only make you understand their features but also help you in fulfilling all the procedures once the retirement scheme/plan is chosen. 

The Various Retirement Products That You May Like to Choose From

Retirement planning involves the accumulation and distribution phase. Pre-retirement phase is about accumulation and the post-retirement phase is the distribution phase taking care of an individual’s financial needs. It is a tough task to select a product/s. Handling the portfolio is another task. It is important to not buy something that does not fit your criteria. 

Here are some of the retirement products available in India that are discussed with their features to help you choose from them:

1. Employee Provident Fund and Voluntary Provident Fund: EPF contributions are made by both the employer and the employee. These are mandatory contributions as per the rules governing the scheme. EPF is quite a reliable source and it can effectively replace the salary as retiral saving. However, EPF may not be sufficient and it is advisable to save money using other options. 

Let us understand with the help of an example how EPF can give an employee the benefits of compounding. In this example, the basic pay of the employee is Rs. 50,000. Both the employer and the employee make a contribution of 12% of the basic pay. 

The employer’s contribution is divided between the EPF and Employee Pension Scheme. 3.67% of it goes towards EPF and the rest towards the EPS. The opening balance in the first month is 0. But from the next month onwards the contributions will fetch interest on the opening balance. This way it gets compounded. The rate of interest is assumed at 8.55%The calculation is shown in the below table. The last column shows the interest accrued and is added to the balance of the next month.

Voluntary contributions can be made under VPF to contribute over and above the mandatory limits. Even the employer can also make such contributions without any cap. It is a good option for private-sector employees and those who are self-employed can create a source of income by choosing VPF.

2. National Pension System: National Pension System is a voluntary defined contribution pension system. It is just like EPF and PPF offer EEE benefits. Meaning the contributions made to NPS, and the entire corpus is tax-exempt. Also, the entire pension withdrawal amount is also tax-free. It is kind of a pension fund founded by the Government of India. All citizens aged between 18 and 65 (Now 70). Contributions made to NPS are tax-exempt under sections 80C and 80CCC. The exemption of Rs. 1.5 lakh allowed under section 80C and an additional amount of Rs. 50,000 is tax-exempt u/s 80CCC.

Suppose Mr Naresh’s age is 35 and he is going to retire at the age of 60. He chooses to contribute Rs. 2000 every month towards NPS. His expected rate of interest is 8%. Further, he opts for 55% of his wealth to be invested in an annuity. The annuity rate of interest is 8%.

Now after 25 years, Mr Naresh will be able to create Pension wealth worth Rs. 19,14,733. Interest Earned will be Rs. 13,14,733. He will be able to save tax amounting to Rs. 1,80,000. His annuity is Rs. 10,53,103 and he will withdraw Rs. 8,61,630 in the form of Rs. 7021 as monthly pension.  

3. Mutual Funds: As discussed earlier, it is necessary to have a well-diversified investment portfolio to balance the risks and returns. Mutual funds are ideal to have different asset classes in your portfolio. Wealth creation is a gradual process and regular monitoring of the portfolio is required. 

SIP is the best way to invest for retirement purposes. You can select any mutual fund that suits your requirement in terms of monthly savings, risk-appetite, and future returns. The mutual fund SIP can be adjusted if you want. Moreover, you can start with very small monthly investments. It can be as low as Rs. 1000.

Here is how a mutual fund SIP is able to generate wealth over a period of time due to the factors like longer tenure involved and the power of compounding.

Usually, there are no penalties or charges if a SIP instalment is missed except for the fact that you will lose a month’s contribution towards your investment plan. 

There are tax-saving ELSS mutual funds but they come with a lock-in period of like 3-5 years. By choosing them you can make a SIP contribution and save tax as well. These funds invest in equity and debt securities as well as in fixed-income securities. 

Let’s study an example where an individual opts for ELSS-SIP mutual fund contributions:

Suppose Rs. 1000 is invested in ELSS-SIP on a monthly basis. The expected rate of return is 12%. And the duration of investment is 20 years. The total amount invested by the end of 20 years will be Rs. 60 lacs. And the estimated return on this amount will be Rs. 1,89,78,698. The amount invested every month will be exempt under section 80C. Thus the total value of your investment will be Rs. 2,49,78,698.

4. Bank Deposits: Fixed deposits are perhaps the oldest and the most popular retirement products in India. Though there has been a shift from the traditional instruments, fixed deposits still find their place on a retired person’s list. 

Fixed deposits allow the investor to enjoy their future without having to worry about anything. They guarantee a fixed income and security of the capital invested. Though the fixed deposits are not able to earn handsome returns, a few schemes still offer higher returns as compared to others. However, it is advisable to divert your funds among various asset classes rather than in fixed deposits alone. 

5. Bonds: Bonds might not be as lucrative as equity stocks in terms of returns, but an investor seldom loses the money which is possible in the case of stocks. Bonds pay interest regularly. You can predict how much income bonds are going to generate. They can be a reliable product to balance your portfolio. They offer higher returns than bank accounts and risk is also low if you are well diversified. Government bonds specifically are helpful to reduce risk and losses as there is no credit risk and they earn periodic returns. There are different types of bonds that you can choose from. Inflation-linked bonds counter the inflation risk. The few other types include RBI bonds, corporate bonds, sovereign gold bonds, etc. 

6. Pension Plans: Pension plans are also known as retirement plans. The sole objective behind investing in such plans is to earn salary-like returns after one retires from a job. It is inevitable to generate a source of income that gives you a regular return over and above other investments to address different requirements. You can tax-free pension for life. There is a flexibility to withdraw the fund at any time. The contributions made are eligible for tax savings under sections 80C and 10(100). All you need to do is contribute a fixed amount on a regular basis until you retire. The accumulated amount is paid back as a pension or annuity at regular intervals of time. There are many pension plans available and you can choose any from them. The types of pension plans in India mainly include the following:

1. Deferred Annuity-Build a corpus by contributing a single or daily premium. 

2. Immediate Annuity-It is paid out right away. By depositing a lumsum you can start geting immediate pension. There a few tax benefits also that you can get.

3. Annuity Certain-Select a payment duration as per your convenience to receive pension. This is one of the best plans as it allows to collect the annuity for a certain number of years. If the insured dies, the nominee of the pension will get the amount. 

4. Life Annuity-The plans remains active until the death of the insured. If you choose the ‘with spouse’ option then the spouse will receive the pension in case of the insured’s death. 

7. Life Insurance: Life insurance can act as a retirement planning instrument. It is a long-term financial tool but since the premiums are less, it is very affordable. The premiums are tax-deductible and on maturity, the policyholder benefits by receiving the lumpsum amount. Those who have extra funds can think about taking Unit Linked Insurance Plans. However, it is advisable to keep life insurance and investment objectives separate from each other. If you dedicatedly invest in different types of assets, you will definitely get better returns than by investing in life insurance-linked investment plans. You should always buy a life insurance cover, but keep it separate from your investment plans. 

Conclusion

The above article puts weightage on having a retirement plan of your own. Each individual is unique and so are their requirements. Depending upon your needs, you can set aside a fixed sum and invest it into your choice of investment schemes. But the sole aim to do so is to create a corpus that can financially support you in your golden years. It is always better to start planning as early as possible. The amount that you can invest now will have an impact on your future. Similarly the type of investment options included in your portfolio must be chosen after a thorough consideration. You can take help of a professional advisor if you are unable to make your own plan or choose the right king of retirement products. Having a plan and adhering to it shall make you worryfree as financial independence is all that you need.  It has the capability to make your retirement life happier.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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