Starting retirement planning early is definitely advisable as it allows for a steady build-up of the corpus
"Planning for retirement" is probably the most ignored aspect of financial planning as most individuals start thinking about it only in their 40s. However, they actually get down to implementing it only in their late 40s or early 50s. Studies suggest that an individual requires about 70-90 per cent of the last drawn income to lead a self-sufficient retired life.
Retirement planning broadly involves two steps – accumulating (savings) and annuity. Embarking on the accumulation or savings journey early 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 build 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 a 30-year-old and a 40-year-old working professional 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. Whereas, the 40-year-old will have to invest Rs. 2 lakh annually for 20 years, i.e. the total investment of Rs 40 lakh. There are several long-term savings products that 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 the very purpose. It is crucial to prioritize 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 the regular lifelong income. Annuity products are available in two variants – Immediate and Deferred annuity. In Immediate annuity, the regular income starts immediately upon purchase and is best suited to individuals who are on the verge of retiring. While in the Deferred annuity option, the start of the income can be deferred for a maximum period of 10 years. This option can enable even a 50 or 55-year-old to plan for retirement income well-in advance since the longer the deferment the higher is the income. Both these variants can combine to develop a retirement income solution that offers increasing income, which is essential given the rising cost of living.
Some annuity products provide features such as the early return of purchase price upon reaching 76 years or on turning 80. The Joint Life annuity, with the 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 regular income. After the demise of both policyholders and annuitants, the purchase price is returned to the nominee.
Starting retirement planning early is definitely advisable as it allows for a steady build-up of the corpus. This corpus can be used to purchase an annuity product that will provide guaranteed lifelong regular income. An innovative annuity product such as ICICI Pru Guaranteed Pension Plan provides a retirement solution to receive increasing income thereby enabling one to be financially independent in their golden years.
The author is Chief Distribution Officer, ICICI Prudential Life Insurance
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