An insight into selecting the best pension plan available for you in India. A sneak peeks into different aspects that govern them as well.
Pension plans have a pretty simple goal of providing you with regular income post your retirement. To get a steady flow of income post your retirement you need to plan your investments carefully. Let us assume you expect a pension of Rs. 40000 a month on your retirement. Given the standard retirement age of 60 years and normal life expectancy of 80 years, your corpus needs to be Rs. 2.36 crore.
Good financial planning and right investment tools would give your returns of 12% a year. Postretirement the calculation kind of saturates at 8% and this also includes an inflation of 5%. Keeping all these figures in mind and assuming that you are about 35-36 years old, you would need to save approximately Rs 14000 per month. You would need to continue these for the next 24 to 25 years.
If your current expenditure is higher you would need a bigger corpus amount to continue with a similar lifestyle. Higher pension amount on monthly basis translates to higher corpus amount as well. An amount in crores might sound a lot initially, but with the right tools and balance, it is not all that difficult. The following are some guidelines you can use to build your corpus amount.
Early Bird
We often visit restaurants and events during the early bird offer, to prevail better benefits. The same stands for retirement plans as well. If you start early, you would need to put away smaller amounts. Assuming an average return of 12%, someone in their mid-twenties would need about one third less investment as compared to someone in their mid-thirties. To reach an end goal of Rs 5 crore, an individual who is 25 would have to shell out about Rs 8000 per month. The same person would end up with investments of about Rs 24000 per month if they start 10 years later.
Make it a habit
If you make regular investing as a habit, things become much easier for you. First and foremost you get the benefits of compound interest and cost averaging. Regular investing also brings in lots of financial discipline in you. You can always start with smaller amounts and increase the same as and when possible.
Emergency
Keeping aside emergency funds would ensure your retirement plans are not impacted by anything. Hospitalization costs usually burn a hole in the pocket and having a good health insurance plan can take care of that. As a rule of thumb, you need to have at least three months of your salary as emergency funds. It will help you against dire situations such as job loss.
Choose smartly
For pension or retirement plans, people usually play safe and invest in a public provident fund or employee provident fund. There are no second thoughts about the capabilities of these products as they will provide you with 8-9% returns annually. Pension plans being long term goals, adding the right mix of equity based funds will boost that corpus up by a sizeable margin. Equity based funds can easily provide you 12-15% returns annually.
Another such compelling instrument is the National Pension Scheme. This government provided investment option has lots of flexibility and you can expose your portfolio up to 50% with equity. Equity based funds work on the simple concept of higher risk and higher gains. If you have age by your side, it gives you lots of leverage. In the worst-case scenario of the capital market crashing, you have enough time for your portfolio to bounce back.
There are three primary product lines that one can look into for their pension plans. Retirement plans by life insurance companies, mutual fund retirement funds, and National Pension Scheme. Life insurance retirement plans give you a bit more flexibility as you can go conservative with standard plans or aggressive with unit linked plans. Mutual funds have the card of liquidity up their sleeves. But certain retirement funds allow you to use your money only on retirement age.
To get the right balance between them is the key. As you would want your corpus to grow but at the same time take as few as possible.
