The core function of a pension plan is to give you pension. But do you know how much returns you will get out of pension plans when the time comes for retirement? A lot of pension products do not give a clear idea on how much will you get at the end. What if the return earned is a  mere 4%, when inflation itself is 8% What will you do?

One major drawback is that you have no clue what will happen once you finish the accumulation stage and go on to the withdrawal stage. Let us say you have accumulated Rs. 500 lakhs in a NPS account. They allow you to withdraw say 50% of the amount and the balance has to be taken as an annuity. Let us say you are compelled to invest Rs. 250 lakhs in an annuity which pays only Rs. 11,000 per month as a pension.

Let us investigate a bit further. You are 50 years old and plan to retire at 55 years. Suppose your current monthly expenses are Rs 40,000 per month. And you want to maintain the same lifestyle post retirement. Your life expectancy is 85 years. The retirement corpus needed when you retire assuming 8 percent inflation and around 9 percent rate of return is around Rs 18,570,454.(Rs 51584 monthly expenses).

Obviously the monthly pension of Rs 11,000 per month is not at all not sufficient to meet the monthly expenses after retirement!

There is a gap of Rs 40,000  that needs to be taken care of.

Choosing the right investment options will bridge the gap.

So to provide for the gap of Rs 30,000 it will be prudent to go in for some other retirement investments apart from pension.

Besides traditional pension plans, gratuity and PF, there are many investment tools available for senior citizens, which carry no risk, and are tax efficient too. Let’s have a brief look at some of these:

1) SCSS (Senior Citizen Saving Scheme)

Any resident individual who has attained 60 years of age can open this account. Investment under this scheme qualifies for the benefit u/s 80C of the Income Tax Act, 1961. Besides tax benefits, this scheme offers a high rate of interest at the rate of 9.20% per annum with quarterly interest pay-out. Interest paid is taxable and Rs 15,00,000 per individual can be invested.

2) NSC (National Saving Certificate)

People in their transition phase can buy National Savings Certificates (NSCs) every month for five years – re-invest on maturity and relax – On retirement it will fetch them monthly pension as the NSC matures. Investment under NSC fetches 8.60% (VIII issue) and 8.80% (IX issue) with semi annual compounding.

3) Bank Fixed Deposit

Fixed deposit is a financial instrument which allows for money to be deposited with banks for a fixed duration ranging from 15 days to 5 years and above, and earn a higher rate of interest than conventional savings account. On maturity the investor receives a return which is equal to the principal plus the interest earned over the duration of fixed deposit.
Senior citizens who opt for a fixed deposit scheme are sometimes allowed an additional 0.5% on top of the regular return on offer. Deposits for 5 years or longer qualify for a tax benefit u/s 80C of IT Act, 1961.

4) Reverse Mortgage

Retired personnel, who could not acquire many assets for themselves besides a house, can now liquidate the value of house and survive during their retirement period. In a Reverse Mortgage, the borrower pledges a property that he already owns (with no existing loan outstanding against it) and the bank in turn pays a series of cash flows for a fixed tenure to the owner. Any house owner over 60 years of age is eligible for a reverse mortgage.

5) SWP option in Mutual Funds

Systematic withdrawal plan (SWP) is comparatively an unknown entity. SWP is the reverse of SIP. Where in SIP one looks at accumulating a corpus by making regular investments into a fund, in SWP the person can regularly withdraw a fixed amount of money from a fund.  The amount to be withdrawn and the frequency is fixed by the investor. So one can have a monthly, quarterly or annual frequency for any fixed amount that he/she wishes to receive

6) EPF (Employee Provident Fund) benefits of salaried individuals

Employee Provident Fund is a very important tool of retirement planning. The tax free interest (compounding) and the maturity ensures a good growth of your money. If continued for a very long term, it can help immensely in meeting retirement goal. PF Entitles for Pension

The pension on retirement is linked to the number of years in service and the average salary drawn in the year before retirement. This contribution in EPS helps in building a corpus for your pension. Although the maximum pension has been limited to Rs 3500 p.m., it is possible to get a higher pension if employer contributes on basis of employee actual pay and not.

There are special occasions in your family or some emergency arises. In case of need of funds and no recourse, EPF comes handy as it gives option to withdraw from the corpus but within a certain limit and by meeting some specified conditions.

7) VPF

Voluntary Provident Fund is a version of the traditional provident fund saving scheme where in  you retain the control to periodically assign a specific amount to the provident fund, voluntarily, as part of your VPF contribution. Voluntary PF will help you amass a sizable savings portfolio and provide a long term savings option for those big life milestones plus retirement.

Power of Compounding and Early Investing

It is all about investing early in life and also how powerful compound interest and regular investing is. When we invest early in our lives, the amount keeps growing and when it becomes a big chunk, the growth in amount every year is a lot more, compared to initial years .

For Example: Suppose you started in 2008 and wanted to save for retirement and if  you regularly invested 1 lakh every year at 15% return per annum , the investment will be Rs 4.35 Crores in 2038 , but if you started late after 2 years and started in 2010 , it will be Rs 3.27 Crores only by 2038 , that will leave you with Rs 1.08 Crore less money.

Even a delay of 1 year will result in total corpus of Rs 3.77 Crores , which is short of Rs. 58 Lakhs. This 58 Lakhs is nothing but 15% interest on 3.77 Crores which you missed.

This happens because in later years you don’t get benefit of compounding.

Savings of 25-30% of current income is a must to meet the retirement expenditure. Setting aside a separate savings a/c aside for the goal of retirement planning is a good option


Asset allocation and diversification

It is important to invest in the right assets. As per a study, 91% performance of a portfolio is linked to asset allocation. Selection of securities, timing and others account for the rest 9%. Right asset allocation is important as every asset goes through different cycles of ups and downs and has a different risk-return profile. Diversification is needed to optimize returns. Most retired people think that since they do not have a big income stream, they should focus on capital preservation and invest in fixed deposits. However, they must appreciate that they have 25-30 years ahead of them. Some exposure to stocks can increase the returns.

The allocation between equity and debt will depend upon one’s risk appetite. Generally, the older the person, the lesser risk he must take. But this may not be in many cases. For instance, a retired person with no obligations and sufficient funds to meet his day-to-day expenses can consider a higher exposure to equities.

Supplementary income during retirement might be a good option too

Retirees have many job skills to offer an employer. Many also have the expertise to start their own business, to finally follow that dream they’ve put off for years or create an entirely new work path. In this way they can supplement their income in retirement too.

Whether you need to work to supplement your retirement income or just want to have fun or you are enthusiastic about a second career, the opportunities are there. Many times it just takes just some imagination, a positive attitude and sometimes just asking for an opportunity to get the job you are seeking!!

We hope we have answered your queries on why planning for retirement at an early stage is beneficial for you. If you still have any unanswered questions or need help, feel free to contact us.

We would be glad to help you with your planning and investment related decisions.

Debalina Roy Chowdhury

Para Planner

Dilzer Consultants