Four Things to Consider Before You Buy a Retirement Plan
Every single one of us visualizes our retirement life post our long and successful careers. However, we're living longer than ever due to modern medicine; hence retirement plans in this era must cover at least two decades.
To ensure that this period is stress-free, a retirement savings plan becomes crucial; the financial corpus accumulated during a person's retirement years converts this dream into a reality. In addition, a retiree must ensure that his monthly income plan meets his family's needs without compromising their existing living standards. Finally, peace of mind becomes necessary at this age as well.
All these reasons make it crucial to start evaluating your retirement plan as early as possible. Early evaluation gives you a more considerable amount of time to build the retirement corpus while also lessening the financial burden you place on yourself during the later phases of your working years.
There are tons of sources available on the internet that would guide you toward creating a retirement plan; if you are still not confident with your conclusions after doing your independent research, consult a financial planner. There is no one-size-fits-all retirement plan, so consider all of your financial goals and the standard of living you expect for you and your family post-retirement.
Firstly, ask yourself if you are ready to take the most extended vacation of your life. Then, once you have made up your mind, picture the retirement you have in your mind and ask yourself if you have the financial resources to fund it on a fundamental level. If you have both of these covered and are diligent about planning your retirement and consulting the appropriate professionals, you should be good.
The easiest way to do this is to hire a financial planner or wealth manager who will do this for you. The actual actions that enable you to retire would have started years earlier through the process of saving and investing. Now you need to go through a financial check such as how much money you need, how many dependents you have, the retirement period, expenses you will incur, whether you have a contingency reserve, etc.
Instead of allocating your savings into various asset classes yourself, a consideration you could make is a retirement plan. Insurance companies offer retirement savings plans. There are many retirement plans that you could consider based on your financial goals and the factors you deem necessary. Nonetheless, these are four factors we think you should think about.
1) Guaranteed1 Income Plans
These are monthly income plans that ensure that you receive a fixed payout to meet expenses and substitute your current monthly income.
The income you receive on these plans is tax*-free as per the Income Tax Act, 1961. Furthermore, you do not have to wait years after completing the annual premium payments to start receiving the fixed monthly payments. It can start earlier or later depending on the policy. The policyholder can also name a nominee in the unfortunate case of his/her demise who can choose to receive a lump-sum payment or a fixed monthly payment.
2) Inflation Protection
Not a lot of things can impact your retirement outlook negatively, as inflation does. Inflation effectively reduces your purchasing power and also erodes your savings. But another painful reality is the fact that the effect of inflation on goods consumed by retirees is even more significant, e.g., healthcare and wellness products.
Thus, if you do not protect your assets against inflation effectively, you will be able to meet a smaller number of needs than you've projected in the future as they become costlier. Therefore, ensure that the retirement plan you create considers the projected inflation rate and beats it.
3) Calculate your Retirement Corpus
Before you go ahead and start thinking of retirement savings plans alternatives, it is essential to assess the size of the investment corpus you want to create, which is paid to you as per your monthly income plan. Some of the factors addressed below will help you determine the kind of investment corpus you need.
One factor is computing the number of years you have till your age of retirement. Of course, everyone has different circumstances and goals, making the age at which you retire a highly personal and subjective one. But always remember, the sooner you quit, the longer the post-retirement years necessitating a larger investment corpus.
You should consider inflation; if you are young, you can view a lower inflation rate during your retirement years. By that time, India could shift from being a developing country to a developed one with lower inflation rates.
A third factor would be to compute the expected monthly expenses you would have during your retirement years. Expected monthly expense is a factor that directly affects your monthly income plan. Link your family's current lifestyle and how you expect them to change in the future and multiply this into an estimated number of retirement years that you have thought of.
4) Identify your Risk Appetite
Identifying your risk appetite determines the asset classes you invest in to reach your retirement savings goal. You can invest in various other asset classes that would contribute to your investment corpus outside of the annual premium that goes into your guaranteed1 income plan.
Suppose you are an aggressive investor, which is especially the case in your younger years. In that case, you could allocate a more significant amount of money into equity-driven products such as mutual funds, stocks, and alternative investment funds. These assets have a more substantial amount of volatility than other asset classes; there is generally no capital protection involved, so there are chances of a part of the potential retirement corpus being eroded. On the other hand, most of these asset classes are available at a click of a button due to brokerage apps. There are a large number of tools to perform financial analysis as well, which make decision-making easier. A different way to assess your risk appetite here is whether you want to be an active investor where you make investment decisions on your own or a passive investor where a fund manager makes decisions on your behalf.
On the other hand, if you are an investor that prefers to play it safe, you have the option of investing in government bonds, corporate bonds, debt funds, FDs, pension funds, etc. These asset classes give you a fixed return in terms of interest and offer capital protection, ensuring that your retirement corpus is well-protected.
We sincerely hope you keep some of the pointers mentioned above in mind; maintaining vigilance and patience is the way to build a retirement plan that will likely succeed and ensure you have a great retirement life.