“The question is not at what age you want to retire, but at what income you want to retire.”
Just a few decades back, most people didn't have to worry about retirement planning as they had a hefty pension that served as their security blanket in their sunset years. But, with the increase in private-sector jobs, a steady rise in inflation and average lifespan, today it has become mandatory to plan for one's retirement. And, as financial experts often advise, "It's never too early to plan for retirement."
Today, there are plenty of ways to build a substantial retirement corpus that helps you enjoy the golden years of your life without any financial worries. Retirement plans are one of the best investment products for retirement planning. Here, in this guide, we provide you with all the information required to enjoy a graceful and stress-free retirement with the right retirement insurance plan.
What is a retirement insurance plan?
A retirement plan (also known as a pension plan) is a specific type of insurance policy that helps individuals build a retirement corpus with regular investments for several years. Generally, most retirement plans have two distinct phases:
The accumulation phase
As the name implies, the accumulation phase is when an individual makes regular contributions in the form of premium payments. During the accumulation stage, there are no returns. Instead, you work on building a retirement corpus that you can enjoy in your post-retirement years.
During the accumulation phase, your insurance company invests your money in securities, equities, government bonds or other investment methods to help you build the accumulated sum.
The vesting phase
The accumulation phase is followed by the vesting period, also known as distribution or annuity phase. It's the age when you start receiving payouts from your retirement plan. Generally, most people choose the vesting period to coincide with their retirement age – i.e. the age when they retire from work and no longer earn a steady monthly income. The vesting age can be anywhere from 40 to 70 years, depending on the type of plan chosen and the insurer.
You can choose to withdraw the entire corpus as a lump sum on maturity. However, most retirement plans allow you to withdraw only up to 33% of the accumulated corpus in one go. The rest is paid out as pension in the form of monthly, quarterly, half-yearly or annual payments.
Why is it advisable to invest in retirement plans early?
Let us explain the reason with an example. Consider the case of a unit-linked retirement plan. Let’s assume that Mr Mohit is a 32-year-old individual employed in a private firm. He earns Rs. 50,000 per month. He plans to retire at 60 years and expects to live up to 80 years (the average lifespan). He wants to maintain his current lifestyle and receive an income of Rs. 50,000 per month, post-retirement.
Now considering a modest inflation rate of 6%, he needs to build a corpus of Rs. 7.15 crores to receive a monthly pension of Rs. 50,000 post-retirement. He can build this corpus by investing in a unit-linked retirement plan. He needs to invest around Rs. 26,000 per month till the age of 60 to build his target corpus.
Now, if Mr Mohit had started his retirement planning by the time he turned 30, then his monthly investments for the scheme drop to Rs. 20,000. This is why financial advisors recommend investing in retirement plans early. The earlier you start, the lower is your premium.
Advantages of Investing in Retirement Plans
Helps you build a retirement corpus that can help you meet any emergency expenses post-retirement – medical expenses and more.
Inculcates the habit of saving during your peak earning years.
Helps you enjoy an independent life after retirement without depending on your children.
Enjoy tax-saving on the premiums you pay for retirement insurance plans.
Above all, helps you enjoy the golden years of your life doing what you love – pursuing new hobbies, travelling the world, etc.
Major Types of Retirement Plans
There are several types of retirement plans available in India. Understanding the features of these plans helps you choose the right pension plan that best fits your post-retirement needs.
Deferred Annuity Plan
It’s the most basic type of retirement plan. When people refer to a pension plan, they are generally speaking about the deferred annuity plan. It allows policyholders to accumulate their funds with regular premiums for a fixed tenure. Once the premium payment tenure is over, the policy starts dispensing the pension benefits.
One of the most significant advantages of the deferred annuity plan is that the amount invested in it, i.e. the premium is exempted from tax calculations. So, it offers a dual benefit to investors – retirement planning along with tax deductions.
Some insurers even offer you the option of purchasing the deferred annuity plan in one go, instead of paying multiple premiums for the plan’s tenure. You can opt for this option if you have a lump sum to invest.
Immediate Annuity Plan
As the name implies, in an immediate annuity plan, the pension starts immediately on paying the premium. There is no accumulation stage. It's useful for retirees who receive a lump sum amount on retirement. They can invest the lump sum in this plan to receive regular pensions in their retirement years.
NPS (National Pension Plans)
It's a government-sponsored scheme. It helps individuals plan for their post-retirement years. Initially, the NPS was open only to employees of the central government. However, now it's open to all individuals. Contributions made to the NPS scheme are invested in both equities and debts.
At the end of the accumulation stage, investors can withdraw up to 60% of their total savings in one go. The rest of the accumulated sum is used to purchase an annuity. Unlike deferred and immediate annuity plans, the maturity sum is not eligible for tax exemption.
Annuity Certain Plans
Here the pension is disbursed for a specific period. For instance, the policyholder can choose to receive a pension between 60 to 75 years. Also, if the policyholder passes away during the pension receiving period, the nominee can claim the pension after the demise of the policyholder.
Guaranteed Period Annuity Plan
In this plan, the annuity is disbursed for specific periods like 5, 10 or 20 years. The policyholder chooses the period during policy application.
With Cover Pension Plans
The pension payments stop after the death of the policyholder. Here, the nominee(s) of the policyholder receives a lump sum amount after the demise of the policyholder.
Here, the pensions are paid till the death of the policyholder. Some life annuity plans have the option of “with spouse,” where the pensions are paid to the surviving spouse after the death of the policyholder.
These are funds that are regulated by the PFRDA (Pension Fund Regulatory and Development Authority) of India. Currently, six fund houses in India are authorised to offer pension funds.
Additional Reading: 5 Retirement Planning Mistakes to Avoid
How to choose the right retirement plan?
With numerous options available on the market, finding the right retirement plan that fits you best can be indeed overwhelming. Here are a couple of pointers that will help you secure the best plan to enjoy your post-retirement life without any financial worries.
Do your Research and Make a Smart Decision
Investing early in a retirement plan not only reduces your premium costs but also helps you build a larger corpus. The longer you stay invested in, the higher the corpus accumulated.
Make sure to understand the policy thoroughly before investing in it. Also, don’t choose a pension plan just because of the tax savings it offers. Instead, consider its maturity benefits and make a smart decision.
Consider your Personal Requirements
Before you choose any retirement plan, you need to work out your post-retirement finances carefully. Calculate the expected post-retirement expenses like medical costs, lifestyle needs, daily expenses, travel and more to arrive at the retirement corpus that best suits the needs of you and your spouse. Don't forget to factor in the inflation rates while calculating the retirement corpus.
Using an online retirement calculator makes it easy to plan for your retirement. The calculator not only gives you the required corpus but also shows you the amount you have to invest every month, to build the corpus, by the time you retire.
Plan your Retirement and Retire Gracefully
Retirement insurance plans are a great way to start planning for your retirement. The sooner you start, the higher your returns are. Compare the features and benefits of different retirement plans from various insurers and start planning for your retirement today.