By Dilshad Billimoria

Retirement planning is essential for financial independence in later years. However, many individuals in India delay this process, often due to a lack of understanding or awareness. Recent surveys highlight that 40 per cent of urban Indians have not begun saving for retirement, and 61 per cent fear running out of funds within a decade of retiring. This article outlines strategies tailored to different life stages, helping you prepare for a secure retirement.

Early Career (20s To Early 30s): Building The Foundation

Starting early is the most effective way to ensure a comfortable retirement. During this phase, even small, consistent contributions can grow significantly due to the power of compounding. Allocating a portion of your income to long-term investment tools is critical.

National Pension System (NPS): This government-backed plan provides tax benefits under Section 80C and an additional Rs 50,000 exemption under Section 80CCD(1B).

In addition to individual contributions, NPS offers significant tax benefits on employer contributions under Section 80CCD(2) of the Income Tax Act. Employers can contribute up to 10 per cent of an employee's salary (Basic + Dearness Allowance) to the NPS, and this amount is deductible from the employee's taxable income. For central government employees, this limit is extended to 14 per cent of salary. Notably, this deduction is over and above the Rs 1.5 lakh limit under Section 80C, providing an additional avenue for tax savings. This employer contribution not only enhances the retirement corpus but also offers immediate tax relief, making NPS a compelling choice for long-term financial planning.

Equity Mutual Funds: SIPs in equity-oriented mutual funds are ideal for young investors looking for higher long-term returns.

Public Provident Fund (PPF): Known for its tax-free returns, PPF remains a safe and popular choice for retirement savings.

 Exempt-Exempt-Exempt (EEE) Tax Benefits in Retirement Planning: Certain retirement savings tools in India, like the Public Provident Fund (PPF) and partially for NPS, fall under the EEE tax framework. This offers a significant advantage for long-term financial planning:  

Exempt At Investment Stage: Contributions made to PPF (up to Rs 1.5 lakh annually under Section 80C) or NPS (under Sections 80C, 80CCD(1B), and 80CCD(2)) qualify for income tax deductions.

Exempt On Returns: Interest earned on PPF is entirely tax-free. In the case of NPS, returns generated in the accumulation phase are not taxed. Exempt On Withdrawal: PPF: At maturity, the entire corpus, including interest, is tax-free. NPS: 60 per cent of the total corpus withdrawn at retirement is tax-exempt, while the remaining 40 per cent must be used to purchase an annuity, which is taxed as per applicable rates. This triple exemption makes these instruments an attractive choice for building a secure retirement corpus while enjoying tax benefits across all stages. A disciplined approach in these years lays a strong foundation for financial security later in life ‘Private Health Insurers Going Back On Their Commitments’, BJP MP Calls For Stricter Regulation

Mid-Career (Mid-30s To 40s): Accelerating Contributions

Mid-career is often marked by increased income and responsibilities. This phase provides an opportunity to reassess your retirement goals and accelerate savings.

Estimate Retirement Corpus: Calculate your future monthly expenses, adjusting for inflation, and determine the total corpus required to sustain your lifestyle post-retirement. For instance, if your current monthly expenses are Rs 50,000 and inflation averages 6 per cent annually, you’ll need around Rs 1.6 lakh per month in 20 years. Over a 25-year retirement period, this equates to a corpus of approximately Rs 4.99 crore, assuming 8 per cent rate of return on Investment and 7 per cent inflation translating to approximately 0.93-1 per cent real return.   

Fill The Savings Gap: Assess your existing savings and identify the shortfall to accelerate contributions accordingly.   

Diversified Investments: Balance your portfolio with a mix of equities, debt instruments, and gold to manage risks.  

Employer-Sponsored Plans: Maximise contributions to the Employee Provident Fund (EPF) or superannuation funds if offered by your employer. This is also a good time to consider real estate as an additional income source, particularly rental properties that can provide steady cash flow post-retirement.

Pre-Retirement (50s To Early 60s): Securing The Future

As retirement nears, the focus should shift from growth to preservation of capital and ensuring steady income. At this stage, safety and predictability take precedence over high returns.

Low-Risk Investments: Senior Citizen Savings Schemes (SCSS), Post Office Monthly Income Schemes, and government bonds are secure options that offer predictable returns.

Annuity Plans: Investing in annuities provides a guaranteed income for life, which can be especially useful for retirees without other sources of income.

Portfolio Rebalancing: Adjust your portfolio to include more low-risk instruments while reducing exposure to volatile equities. Additionally, ensure you have adequate health insurance to cover rising medical costs, which can otherwise deplete your savings. Risk Management: Its Significance In Financial Planning And How You Can Do It 

Post-Retirement: Sustaining The Corpus

Post-retirement, managing your accumulated wealth is crucial to ensure it lasts throughout your lifetime. This involves striking a balance between maintaining income and controlling expenses.

Systematic Withdrawal Plans (SWPs): Mutual fund SWPs offer a regular income while keeping your funds invested for potential growth. Budgeting And Expense Management: Categorize expenses into essentials and discretionary items to prioritise spending.

Healthcare Planning: Invest in comprehensive health insurance plans to safeguard against medical emergencies and ensure peace of mind. Exploring part-time work or consulting opportunities can also help supplement your income and keep you mentally active. Building A Strong Retirement Corpus: Vishal Kapoor Emphasizes The Role Of Equity, SWPs, And Risk

General Recommendations Across Life Stages

Set Clear Goals: Define your retirement objectives, including the age of retirement and the lifestyle you aspire to maintain.

Monitor Investments: Regularly review and rebalance your portfolio to ensure alignment with your goals and market conditions.

Seek Professional Guidance: Financial advisors can help tailor strategies to your unique circumstances and ensure you stay on track.

Have A Clear Strategy and goal in mind and do not get swayed with fads, market movements or fancy investment vehicles.

Emerging Trends In India

The retirement landscape in India is evolving due to rising life expectancy, inflation, and the digitisation of financial tools.

Life Expectancy/Longevity Risk: Indians are living longer, with average life expectancy nearing 70 years. This increases the need for a larger retirement corpus.

Inflation Impact: The rising cost of living erodes purchasing power, emphasising the need for investments that can outpace inflation, such as equities.

Digital Accessibility: Initiatives like the NPS Trust’s online platform make retirement planning more accessible and user-friendly.

Declining Interest Rates: The steady decline in fixed deposit and savings account interest rates has made traditional savings tools less effective for wealth accumulation, pushing individuals toward higher-yield instruments like mutual funds and equity markets.

Social Impact: Shifting societal norms, such as reduced reliance on familial support during retirement, emphasize the importance of personal financial planning for independence in old age.

Conclusion

Retirement planning is not a one-time activity but a lifelong process that requires careful planning and regular review. By adopting tailored strategies at each stage of life, you can build a robust financial foundation, secure your future, and enjoy a stress-free retirement.

Starting early, staying disciplined, and leveraging the right tools and resources will enable you to navigate the complexities of retirement planning effectively, ensuring financial independence and peace of mind in your golden years.

(The author is the founder, managing director, and chief financial planner at Dilzer Consultants Pvt. Ltd. Views expressed are personal and do not reflect the official position or policy of Outlook Media Group and/or its employees. The article is for information purpose only; please consult your financial planner/s before investing.) NPS: A Tax Planning Or A Retirement Planning Tool?