Retirement planning – More than just piling up corpus!

The younger generation today has fancy ideas for retirement. Many dream of retiring early, and then pursuing their hobbies or passions, or seeing the world extensively. Whether you subscribe to this view or whether you have the more traditional view of retirement i.e. retire at 60, plan the occasional pilgrimage and devote time to reading or spirituality – planning for it well would not do you any harm!

Why plan for retirement?

Fewer and fewer people today are covered by the government sponsored pension schemes – most salaried people have a basic Provident Fund but are otherwise left to fend for their own. Self-employed professionals and businessmen often do not even have this. On the other hand, life expectancy has significantly – most would want to plan for retired life atleast till the age of 85, if not more. Assuming a retirement age of 60 or 65, this is a good 20-25 years of life that has to be planned for.

Cultural factors too have contributed to the importance of retirement planning. Families have got nuclear – it has become more common for children to travel elsewhere in lookout for good career opportunities. Even if children stay committed to supporting their elderly parents, the latter increasingly want to avoid over-relying on this support. The mindset has changed to plan to be self-reliant, and take the support (financial or otherwise) offered by children as a welcome bonus.

There are various dimensions of a retirement plan, in terms of how they are useful and what factors should one go about looking for in each of them.

Owned residence

There is nothing as satisfying as identifying and buying the home you want to live in post retirement, well in advance. It enables the more particular couples to plan the construction, the interiors, and possibly even the garden (in case of a bungalow) well in advance. This makes eminent financial sense too. Real estate is a great hedge against inflation and movement of real estate prices – as these effects get magnified with the long time duration involved in your retired life, your property value also appreciates. Conversely, those living in rented accommodation would experience the worst impact of inflation as their leases get renewed at higher and higher rentals.

Medical and property insurance

For most of us in India, insurance (especially non-life or general insurance) does not come as naturally as buying a house. Consider medical insurance or Mediclaim first. With increased life expectancy and susceptibility to lifestyle diseases, your average medical expenses are only going to sharply increase post retirement. Medical emergencies needing hospitalisation certainly need to be provided for, so that financial hardship does not add to emotional burden of illness. The key point here is that most Mediclaim policies do not cover pre-existing illnesses; it thus makes sense to start the premium payments when you are young (and hale and hearty). Nowadays, Mediclaim policies are available at attractive rates, with the government throwing in tax benefits for good measure. We take a more detailed look at various Mediclaim options available to the customer in a subsequent article in this space.

Property insurance is another item that can enormously add to your peace of mind, especially post retirement, at very low cost. Home insurance typically covers the construction cost of the home against fire, earthquake or similar disaster. A house construction cost and valuables worth Rs. 20 lakh can be insured for an annual premium of ~Rs. 6,000.

Life insurance

Ironically, the criticality of getting life insurance decreases with age, and becomes nearly non-existent when you retire! This is because life insurance is meant to cover you for your remaining earning potential, which anyway decreases post retirement. Also, hopefully, by then, all your goals are already provided for, making your family not dependent on life insurance to see them through.

Instead, you would be better off focussing on getting all the legal papers of your investments and assets in order, as covered in the next section.

Financial assets

This is an important and large category of retirement plan. The main considerations in planning the financial assets are: regular income, protection against inflation, and liquidity corpus for contingencies. Financial assets can be in various forms – equity, debt, mutual funds, or even a real estate property that generates rental income. Several mutual funds have specific retirement plans.

In case you have children’s wedding events that are likely to occur post retirement, you may consider saving for them in the form of gold (either as jewellery or as gold exchange-traded-funds). This is especially true of families where expenditure on ornaments during weddings is significant.

We shall examine these financial asset options in more detail in a subsequent article.

In summary

A retirement plan is multidimensional. It is best to think of it holistically, and sufficiently early in your career, so that you can proactively manage its different facets!

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