LONG TERM RETIREMENT PLANNING FOR THE YOUNG
RETIREMENT PLANNING - FOR THE NEEDS OF THE GOLDEN YEARS
THINKING OF OLD AGE ?
As one settles in life with a family to support , worries start haunting about the future . At the beginning of the career , such worries about the future and retirement would be minimal . As age progresses , worry about retirement also progressively catches up . As one thinks of future when one no longer could earn as now , one wants to prepare for the future for his golden years . Though it is not advisable to start worrying for distant retirement at an young age , it is better to start planning for old age at young age itself . Such planning should start from positive belief that one will live long enough even after his prime earning years are over and one will live better , bigger , richer life than the present . Such planning also aim to achieve new heights of one's life financially or otherwise even when one 's income has stopped from present day job . Such planning should keep at bay all one's concerns about old age .
Three prominent concerns about old age will be Housing , Health and Income . Hence one would may build a house in his prime time and gets assurance of housing for his old age . For this purpose , one can take support of Housing loans available from Banks / financial institutions. While concerns about health and income are more complex . Health may deteriorate over the years and even if one continues it be healthy , worry may not go away . One immediate remedy may to take Health insurance which may alleviate the concern to some extent . But as cost of health care goes on increasing over the years , one has to progressively increase the insurance amount to take care of inflation in health care . As one can be almost sure of dwindling income as one retires from his service / profession , one needs to take steps at the earliest possible to have supplementary income in the retirement years . While one need not part today's peace and happiness for tomorrow's worries , one can take care in such a way that tomorrow's worries do not spoil today's pleasures . Some first care , like first aid ,about future will keep tomorrow's worries at bay while keeping today's happiness intact .
How much one needs to save for future depends up on at what life stage one is presently in . if one is young , one can afford to keep a smaller portion for future as there will be immediate requirements to be attended like marriage , housing , children education etc . As one ages , and some of the immediate and medium term requirements get fulfilled , one may concentrate his maximum resources for retirement years . As retirement years approach and materializes , one has to fund all his resources to make his retirement safe , secure and healthy .
As planning for retirement needs long term planning and investments , we give below the priorities with which one can plan his finance and long term investment options available
PRESENT NEEDS COME FIRST - WE HAVE TO SURVIVE NOW :
1. NEEDS COME FIRST
Pay first attention towards managing immediate needs like accommodation , clothing , food etc . Manage your needs as needs only with as much less expenses as possible . You may spend on entertainment and leisure and at the end of the month , one should have some saving for the future . Balancing today's requirement against tomorrow's worries needs tact .
2. PAY TAXES : Treat Tax payment as there is no escape and make adequate provision for the same
3. TAKE INSURANCE
Treat insurance as part of needed expenses . It is another way of having emergency fund in case of accident , hospitalization etc . Further insurance premia to be paid at younger age is much cheaper than taking them as you get older . Further life insurance is also away of saving for future . It also helps in managing your income tax in case you have to start paying . But do not over insure your self than what premium you can afford . Insurance should serve only as a vehicle of insurance and not as investment . There are better avenues available for investment than taking insurance policies . Returns on money invested in life insurance is modest only as insurance companies deduct risk premia from the money invested and service charges are also taken out . Visit INSURANCE page for knowing more . While taking Health insurance policy , make sure the same can be renewed life long . Otherwise it will be difficult to get a fresh mediclaim policy at the matured age .
YOUR GROSS SAVINGS : You will be left with your gross savings after paying for your needs , insurance and taxes . Out of which you will first build your emergency fund which is to be touched in emergencies only i.e when your income stops flowing in or medical events / accidents . Balance amount you save every month is the amount you can spend now for your indulgences , keep it as margin for up coming bigger purchases or for your investment for future . You have to decide what percentage of your savings goes where . For example if you are left with a savings of Rs 5,000 , You may chose buy a branded sun glass costing all your savings , or keep it as a margin for your smart phone costing Rs 40,000 you dreamt to have or for purchase of a TV you want to have or invest entire amount in stock market . Otherwise you may also spend a portion say Rs 1,000 on a sun glass , keep aside Rs 2,000 for margin towards smart phone and invest balance of Rs 2,000 in a Recurring deposit in a bank or SIP for a mutual fund . Choice is yours and use it judiciously . You have to balance between today's pleasures against future dreams . One need not sacrifice any one for the other . You may have both in a limited way . Remember future security will also contribute to today's peace . Now some tips on both viz spending vs investment . It is better to set aside certain portion of savings for investment before indulging in luxuries for today .
FINANCIAL GOALS FOR RETIRED LIFE :
FINANCIAL GOALS FOR RETIREMENT : During your retirement period , normally you will require
1. Monthly income / pension : You require a monthly income plan / pension plan after your retirement especially when your employer has not providing any pension amount after retirement .
2. Lumpsum amount to take care of emergency needs : The other requirement is lumpsum emergency funds to be used for the unfulfilled tasks you have to complete after retirement . Such tasks may be children education or marriage expenses or your own health related fund requirements .
You may want to retain the same lifestyle during retired life as enjoyed during your working period . If your retirement is far off , say about 30 years or more , it's difficult quantify the exact requirement either pension or emergency funds . It all depends up on your family size . your financial health and unfinished tasks at the time of retirement as well as inflation during the in-between period , your income , life style at the time of retirement .
RETIREMENT PLANNING CALCULATOR
Now keeping in view of your money requirement at the time of retirement and thereafter , you may calculate Present value of future money . Suppose if you are earning Rs 30,000 per month and you want to have the same lifestyle after 30 years , you may require to earn Rs 1,75,000 per month , if we assume an average inflation of 6 % per year . But if average inflation turns out 7 % , requirement will go up to Rs 2,30,000 per month . Now you may understand how difficult to predict the future
To calculate present value of future money , there are websites which provide calculators for such an exercise . Here we are giving a link to one of such websites to enable you to calculate it . ( CLICK HERE )
Hence one can start saving for the future what one can by leading a simple life and saving as much as one can for the future , without sacrificing today's requirement for a happy life . Some of the financial planners suggest a certain percentage of income to be saved first before spending . But in our opinion , it depends up on individual's capacity and we do not recommend add undue pressure on finances during the working days which would make one miserable now . However we agree that certain discipline is required in managing one's finance .
Now out of the savings , how one has to invest for long term and what are the options available .
LONG TERM INVESTMENT PLANS - PENSION PLANS
1 . FOR THE PURPOSE OF PENSION , there are various pension plans available , if the employer is not providing a pension after retirement .
Some of the pension plans are .
1. National pension Scheme : It's a Government of India run plan and details you can have at the following sections
2. Pension plans of Insurance companies :
Many insurance companies have pension plans which can be thought of , as NPS carries just Rs 12,000 per month as maximum pension .
Basic principle of these plans are
1. Save regularly every month in a long term investment plan till the expected age of your retirement
2. Utilize the portion of corpus available on maturity for your expected lumpsum needs like purchase of a house if not already owning or children's education , marriage etc .
3. Invest balance amount of the corpus in a monthly income plan which serves as a pension to you .
The pension plans of the insurance companies may be Unit linked schemes wherein your investment is invested in markets and the amount you get at the end will be market linked . If you do not want to take risk with your pension , you may opt for non-linked schemes .
Some of the popular schemes are :
1. SBI SARAL PENSION PLAN : In this pension of SBI Life Insurance company , you have option , at the time of maturity , you can either opt for commutation , pension or both in various proportions . Minimum entry age is 18 years and maximum 60 years . It's a non-linked policy
2. HDFC LIFE CLICK 2 WEALTH : It's also a market linked pension plan from HDFC Life Insurance company limited . Three plan options to maximize the benefits
1. Invest Plus Option for Insurance cum Investment
2. Premium Waiver Option to protect milestones for dependents
3. Golden Years Benefit Option for retirement planning with whole life cover
3. HDFC ASSURED PENSION PLAN : It's also a market linked pension plan , with diversification in investments from HDFC Life Insurance company limited . Minimum entry age is 18 years and maximum 65 years .
OTHER LONG TERM INVESTMENT AVENUES :
1. SMALL SAVINGS ACCOUNTS :
Following are the Small Savings Accounts promoted by Government of India and managed by department of POSTS :
1. PUBLIC PROVIDENT FUNDS
2. NATIONAL SAVINGS CERTIFICATES
3. KISAN VIKAS PATRA ( KVP )
4. SUKANYA SAMRIDDHI ACCOUNT
5. SENIOR CITIZEN SAVINGS SCHEME
6. TIME DEPOSITS FROM 1 YEAR TO 5 YEARS
7. MONTHLY INCOME SCHEME
8. 5 YEAR RECURRING DEPOSITS SCHEME
Above schemes are basically Medium term plans ranging up to 15 years : For details , CLICK HERE
2. EQUITIES : Though equities have given good returns historically on a long term investment , they are categorised high risk investment and fraught with loss of capital invested . Hence a conservative investor , who is hedging his future , has to keep a small portion of investment only for the purpose . To know about the precautions one has to take before investing in stock markets , Read Here
5 . MUTUAL FUNDS : They are good investment avenue for medium term to long term investment . They come with different risk matrix from low risk to very high risk . To know about various options available in this avenue , CLICK HERE Further one can invest regularly every month by way of systematic Investment Plan
OTHER INVESTMENT AVENUES :
There are various way to invest your savings other than the Financial assets . Some of them are :
1 .HOME , SWEET HOME: You need a shelter of your own in your golden years , even if the present employer is providing quarters now . Take a home loan and construct / buy a house which will be saving you from running around for a shelter during retirement ages . Keep the EMI affordable without going for a fancy house . Any how you may need to refurbish your home at the time of retirement . You may upgrade your house later when you can afford .
2.OTHER REAL ESTATE ASSETS SOLELY FOR INVESTMENT PURPOSE : You may invest your surplus funds in real estate , only if you have funds that may not be needed in near future If you take a loan to acquire a property , Rental income may not suffice to pay loan instalments . Any income you get out of your investment in real estate is capital appreciation . You may have to wait for a long time to make money out of the deal
3.GOLD AND OTHER PRECIOUS METALS : You get profit by capital appreciation only , if you invest in Jewelry . With the payout by way of making charges / tax etc , investment in Jewelry is not a profitable proposition . However by buying gold bonds etc and keeping it in demat form , you may avoid such charges . They are safer avenues and easy to dispose off .
In both real estate and gold investment , risks are high and depends on market , your entry and exit times and returns are not assured . Yet you may get a very good return in long term . Further your investments remain illiquid . Hence keep the investment in these assets as a small percentage of overall investment strategy .
HOW TO INVEST IN EACH SEGMENT ?
Each one has to decide , how much one wants to invest in each segment , keeping one's risk apatite . Yet there are some general rules for a conservative long term investor
Minimize stock market exposure. But start Investing in the stock market early. Mutual funds / SIP is a good option to diversify your portfolio
Consider Government Bonds , Post office savings schemes as both investing and tax saving instruments .
Take insurance . Do not invest all in one scheme . Consider both ULIP and Non-ULIP schemes
Buy / construct a a house for your present and future use . You will have a shelter in your golden years .
Build a portfolio with a mix of investments.
Take an active approach.
HAPPY INVESTING
NATIONAL PENSION SYSTEM ( NPS )
NATIONAL PENSION SYSTEM ( NPS ) : Government of India established Pension Fund Regulatory and Development Authority (PFRDA) on10.10 2003 to develop and regulate pension sector in the country. The National Pension System (NPS) was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens. NPSaims to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens.Initially, NPS was introduced for the new government recruits (except armed forces). With effect from 1stMay, 2009, NPS has been provided for all citizens of the country including the unorganised sector workers on voluntary basis. Additionally, to encourage people from the unorganised sector to voluntarily save for their retirement the Central Government launched a co-contributory pension scheme, 'Swavalamban Scheme' in the Union Budget of 2010-11. Under Swavalamban scheme , the government will contribute a sum of Rs.1,000 to each eligible NPS subscriber who contributes a minimum of Rs.1,000 and maximum Rs.12,000 per annum. This scheme is presently applicable upto F.Y.2016-17.Government of India established Pension Fund Regulatory and Development Authority (PFRDA) - External website that opens in a new window on 10th October, 2003 to develop and regulate pension sector in the country. The National Pension System (NPS) was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens. NPS aims to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens.Initially, NPS was introduced for the new government recruits (except armed forces). With effect from 1st May, 2009, NPS has been provided for all citizens of the country including the unorganised sector workers on voluntary basis.
Additionally, to encourage people from the unorganised sector to voluntarily save for their retirement the Central Government launched a co-contributory pension scheme, 'Swavalamban Scheme ' in the Union Budget of 2010-11. Under Swavalamban Scheme - External website that opens in a new window, the government will contribute a sum of Rs.1,000 to each eligible NPS subscriber who contributes a minimum of Rs.1,000 and maximum Rs.12,000 per annum. This scheme is presently applicable upto F.Y.2016-17.
NPS offers following important features to help subscriber save for retirement:
The subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of subscriber's life. This unique PRAN can be used from any location in India.
PRAN will provide access to two personal accounts:
Tier I Account: This is a non-withdrawable account meant for savings for retirement.
Tier II Account: This is simply a voluntary savings facility. The subscriber is free to withdraw savings from this account whenever subscriber wishes. No tax benefit is available on this account.
NPS offers following important features to help subscriber save for retirement:
The subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of subscriber's life. This unique PRAN can be used from any location in India.
PRAN will provide access to two personal accounts:
Tier I Account: This is a non-withdrawable account meant for savings for retirement.
Tier II Account: This is simply a voluntary savings facility. The subscriber is free to withdraw savings from this account whenever subscriber wishes. No tax benefit is available on this account.
WHO CAN JOIN NPS?
Central Government Employees
NPS is applicable to all new employees of Central Government service (except Armed Forces) and Central Autonomous Bodies joining Government service on or after 1st January 2004. Any other government employee who is not mandatorily covered under NPS can also subscribe to NPS under "All Citizen Model" through a Point of Presence - Service Provider (POP-SP).
State Government Employees
NPS is applicable to all the employees of State Governments, State Autonomous Bodies joining services after the date of notification by the respective State Governments. Any other government employee who is not mandatorily covered under NPS can also subscribe to NPS under "All Citizen Model" through a Point of Presence - Service Provider (POP-SP).
Corporate
A Corporate would have the flexibility to decide investment choice either at subscriber level or at the corporate level centrally for all its underlying subscribers. The corporate or the subscriber can choose any one of Pension Fund Managers (PFMs)-available under “All Citizen Model” and also the percentage in which the funds are allocated in various asset classes.
Individual
All citizens of India between the age of 18 and 60 years as on the date of submission of his / her application to Point of Presence (POP) / Point of Presence-Service Provider (POP-SP) can join NPS.
Unorganised Sector Workers - Swavalamban Yojana
A citizen of India between the age of 18 and 60 years as on the date of submission of his / her application, who belongs to the unorganized sector or is not in a regular employment of the Central or a state government, or an autonomous body/ public sector undertaking of the Central or state government, can open NPS -Swavalamban account.