Do You Have A Retirement Insurance Plan?
In order to enjoy the same standard of living once you are retired and do not have a regular income, there is a need to engage in proper financial planning. And this must necessarily include retirement insurance
Risk is part and parcel of an individual’s life. The risk in human life arises out of two situations – dying too early and living too long. So, there should be proper planning in both of the above cases in order to secure yourself against any adverse circumstances. As longevity is increasing, the concern of living too long is acquiring greater importance. The number of old persons is increasing considerably in almost all countries. Most of the older persons have no earnings due to lack of proper retirement planning. Retirement planning is, in fact, the most neglected aspect of a financial plan.
The main source of income during retirement is what you save during your working life span. Sheer saving isn’t sufficient if you want to survive retirement happily and stress-free. Therefore, savings should be planned in such a manner that they will grow over a period of time and help you survive happy sunset years. Insurance companies offer retirement insurance plans to the public at large so that individuals can plan their retirement and receive regular amounts postretirement. Retirement insurance plans are also called as pension plans. They are a category of annuity plans which are especially designed to cater to providing regular postretirement income.
When a person buys an annuity contract, he pays the insurer a specified capital sum, maybe in instalments, in return for a promise from the insurer to make a series of payments to him as long as he lives. This plan is like life insurance; it is a risk-sharing plan based upon the group of insured of the same age. The risk is of living too long. The contributions are made by all and the insurer applies the law of large numbers. The contributions of a large number of individuals are pooled and each member is paid an annual or monthly amount.
Features of Retirement Pension Plans
• Steady Flow of Income (Annuity): The pension plans are designed to provide steady regular income to retirees. Depending on how you invest in a pension plan, you will receive fixed and steady income after retirement.
• Vesting Age: This is the age at which you start receiving your pension payments. Most pension plans in India have a vesting age of 40-50 years which is flexible up to the age of 70.
• Accumulation Period: This period refers to the period when a policyholder pays the premiums towards accumulation of the corpus. An investor can pay the premiums as lump sum investments or monthly instalments with retirement plans in India.
• Payment Period: The payment period is the period when you start receiving your pension post-retirement. For instance, if an individual receives a pension from the age of 60 years – 80 years then the payment period is 20 years.
• Surrender Value: In case you surrender the pension plan before due date, you will receive the surrender value. It is not recommended to surrender the pension plan before the due date.
Benefits of the Retirement Pension Plans
• Guaranteed Regular Income Post-Retirement : You will receive regular income post-retirement in order to survive. Furthermore, in case of your death you get an option to provide the income to your spouse.
• Insurance Cover : Most pension plans have included insurance cover to protect you against any financial burden.
• Death benefit : These pension plans also provide death benefit in case of death of the insured to his family and dependents. The beneficiary will receive sum assured in case of untimely death.
• Tax Benefits : Contributions to pension or retirement qualify for tax deduction under Section 80 CCC up to the limit of Rs 1.5 lakhs.
Now let us understand how it works with the following example:
How do you calculate retirement goals? Let us assume that Prakash Dixit is a 35-year-old married man and is currently working with an MNC in the position of Managing Director with a salary of Rs 2.5 lakhs per annum. He has one child who is eight years old and his spouse is also 35 years old who is a home-maker. His current household expenses are Rs 1 lakh per annum. He wants to retire at the age of 60. The life expectancy of both Prakash and his spouse is 75 years. So what amount of corpus will be required if they want to maintain the same standard of living post-retirement. A pension plan offers 8 per cent per annum and inflation rate is 5 per cent per annum.
• Current annual household expenses = Rs 1 lakh
• Post-retirement household expenses = Rs 1 lakh
• Inflation rate = 5 per cent per annum DS n Number of years left for retirement = 25 years
• Estimated post-retirement expenses = Rs 3,38,636 n Pension plan offer = 8 per annum
• Real rate of return (inflation-adjusted rate) = 2.86 per cent n Post-retirement years = 25 years (75 years – 60 years)
• Retirement corpus required at the age of 60 of Prakash Dixit = Rs 42,01,400
Dixit should at least receive Rs 3,38,636 as pension every year after retirement in order to survive their post-retirement life with the same standard of living. For this he needs to invest Rs 3166.5 every month that will help him to accumulate Rs 42 lakhs. It is assumed that during the accumulation stage investment will generate return of 10 per cent every year. Purely from a financial planning perspective, Dixit should also invest in another pension plan as well and other investment instruments in order to survive stress-free and happy retirement years without depending on their children.
One should possess a proper financial plan which must include adequate retirement planning. An individual should have a blend of various investment instruments in his retirement plan which will provide stability, regular income and emergency and medical assistance without depending on anyone. Investing in a pension plan will help an individual in receiving taxefficient regular income post-retirement with the coverage of insurance.