One of the most ignored aspects of financial planning is making plans for retirement, as most individuals start thinking about it only in their 40s, and actually get down to implementing it in their late 40s or early 50s.

Studies show an individual requires about 70-90 per cent of their last-drawn salary/income per month to lead a self-sufficient retired life.Keeping that in mind, retirement planning broadly involves two steps—accumulation ie, savings and annuity. Embarking on the accumulation or savings journey early on, gives you an edge as it facilitates making regular contributions over a longer period of time, and allows the funds to multiply due to the power of compounding. Long-term savings products offered by life insurance companies provide an excellent route to building a retirement corpus, while providing life cover throughout the tenure of the product. Retirement tools and calculators available with insurance companies provide visibility on the corpus required.

Let’s see how starting early makes better sense. Take the case of two working professionals—one, a 30-year-old and the other, a 40-year-old—aiming to build a retirement corpus of Rs 1 crore by the age of 60. Assuming a rate of return of 8 per cent, the 30-year-old professional will have to contribute Rs 1 lakh annually for the next 30 years to reach the goal, i.e. the total investment is Rs 30 lakh. The 40-year-old will have to invest Rs 2 lakh annually for 20 years, i.e. a total of Rs 40 lakh. There are several long-term savings products which can be used to build a diversified portfolio across asset classes, the key being making regular contributions and remaining committed for the tenure of the product.

It is strongly recommended that one enters retired life without any debts. Not doing so can result in depletion of the corpus, defeating its purpose. It is crucial to prioritise your finances in the years leading up to retirement, to make the most of the money you have.

Retired individuals seek guaranteed regular income during their lifetime, and annuity products are designed to offer this. By making a single premium payment, retirees can enjoy regular lifelong income. Annuity products are available in two variants—immediate and deferred. In immediate annuity, the regular income starts immediately upon purchase, and is best suited for individuals who are on the verge of retiring. With deferred annuity, the start of the income can be deferred for a maximum of 10 years. This option can enable even a 50- or 55-year-old to plan for retirement income, since the longer the deferment, higher the income. Both these variants can be combined to develop a retirement income solution which offers a payout that increases over time, which is essential given the rising cost of living.

Some annuity products provide features, such as early return of purchase price upon reaching 76 years, or on turning 80. The joint life annuity, with return of purchase price option, ensures that after the demise of the primary recipient (for e.g. husband) the secondary policyholder (for e.g. wife) continues to receive a regular income. The purchase price is returned to the nominee after the demise of both policyholders and annuitants.

To summarise, starting a retirement plan early is definitely advisable, as it allows for a steady build-up of corpus, which can be used to purchase an annuity product that will provide the buyer guaranteed lifelong regular income and financial independence in their golden years.

The writer is Chief Distribution Officer at ICICI Prudential Life Insurance

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