Unlike developed countries, India doesn’t have a universal pension and retirement scheme. Life-long pension and post-retirement benefits are available only to government employees and to a select few in some government-owned enterprises.
In a major part of the corporate sector, including government-owned companies, employees usually receive a large lump sum amount on retirement. This includes gratuity and an accumulated provident fund among others.
Given this, it falls on the concerned person to do financial planning in a way he/she not only maintains the lifestyle but also has financial independence as well.
However, this is easier said than done. That’s why we at ET Intelligence Group thought of providing some kind of guidance to readers who will retire in the not-so-distant future.
The basic principle of retirement planning is to look for a financial instrument that provides regular cash flows (just like a salary), provides a fair amount of protection against inflation and protects your capital too. Also, it is better to not be burdened by any kind of debt.
For instance, in case one has any personal or car loan, ideally, one should pay it off before retirement. And if there is a plan to purchase new house, it should be done few years prior to retirement or just after retirement by paying a lump sum amount from retirement proceeds with little loan.
Good healthcare is expensive and is required most during old age. Except for a few government organisations, medical cover is usually not offered to retired employees. So, it is very important for retirees to spend some amount on medical insurance. The ideal thing to do here is to take a medical insurance policy few years before retirement.
Another important point to take care is that it doesn’t make much sense for someone to take a life insurance policy after retirement. This is because, after retirement, the person’s earning is almost negligible (assuming the person doesn’t take up a job after retirement) and hence the financial capital lost upon the death of the person is very small.
The three important aspects that should be taken care of while planning for living expenses are liquidity, regular income and growth. Typically, the thumb rule here is that one should have around six months of planned monthly expenditure in liquid cash. The next thing to look for is the regular source of monthly income, which would meet all routine monthly expenses. This is where one can choose from the different fixed income plans available.
The three most popular plans available are the post office monthly income schemes offered by post offices, senior citizen savings schemes with monthly return offered by nationalised banks and mutual fund monthly income plans offered by mutual funds.
The first two are taxable, come with assured return but less scope for growth. The last one is not taxable, not assured and has some growth opportunity since these schemes invest around 10-20 % in equities.
The choice among these three schemes would depend on the individual’s income, risk-taking ability and effective tax rate. Otherwise, one can go for a 50:50 combination of one of the first two and the third one. The other possible schemes that provide a monthly income but not very popular, are annuity schemes offered by insurance companies and reverse mortgage of the house.
At the end, after paying for all these investments, if one is still left with some money, he can invest it in assets like equities or gold.
We have tried to represent all the above aspects in terms of indicative numbers (please refer to the table). The three scenarios represent the income and spending levels of different kinds of persons based in different locations.
One should calculate the investment required in monthly income plans to match the required future spending and medical expenses. All other fixed kind of expenses—on a house or a car—should be planned after that. We remind our readers that this is only a guideline and actual planning might differ depending on individual’s circumstances.
In a major part of the corporate sector, including government-owned companies, employees usually receive a large lump sum amount on retirement. This includes gratuity and an accumulated provident fund among others.
Given this, it falls on the concerned person to do financial planning in a way he/she not only maintains the lifestyle but also has financial independence as well.
However, this is easier said than done. That’s why we at ET Intelligence Group thought of providing some kind of guidance to readers who will retire in the not-so-distant future.
The basic principle of retirement planning is to look for a financial instrument that provides regular cash flows (just like a salary), provides a fair amount of protection against inflation and protects your capital too. Also, it is better to not be burdened by any kind of debt.
For instance, in case one has any personal or car loan, ideally, one should pay it off before retirement. And if there is a plan to purchase new house, it should be done few years prior to retirement or just after retirement by paying a lump sum amount from retirement proceeds with little loan.
Good healthcare is expensive and is required most during old age. Except for a few government organisations, medical cover is usually not offered to retired employees. So, it is very important for retirees to spend some amount on medical insurance. The ideal thing to do here is to take a medical insurance policy few years before retirement.
Another important point to take care is that it doesn’t make much sense for someone to take a life insurance policy after retirement. This is because, after retirement, the person’s earning is almost negligible (assuming the person doesn’t take up a job after retirement) and hence the financial capital lost upon the death of the person is very small.
The three important aspects that should be taken care of while planning for living expenses are liquidity, regular income and growth. Typically, the thumb rule here is that one should have around six months of planned monthly expenditure in liquid cash. The next thing to look for is the regular source of monthly income, which would meet all routine monthly expenses. This is where one can choose from the different fixed income plans available.
The three most popular plans available are the post office monthly income schemes offered by post offices, senior citizen savings schemes with monthly return offered by nationalised banks and mutual fund monthly income plans offered by mutual funds.
The first two are taxable, come with assured return but less scope for growth. The last one is not taxable, not assured and has some growth opportunity since these schemes invest around 10-20 % in equities.
The choice among these three schemes would depend on the individual’s income, risk-taking ability and effective tax rate. Otherwise, one can go for a 50:50 combination of one of the first two and the third one. The other possible schemes that provide a monthly income but not very popular, are annuity schemes offered by insurance companies and reverse mortgage of the house.
At the end, after paying for all these investments, if one is still left with some money, he can invest it in assets like equities or gold.
We have tried to represent all the above aspects in terms of indicative numbers (please refer to the table). The three scenarios represent the income and spending levels of different kinds of persons based in different locations.
One should calculate the investment required in monthly income plans to match the required future spending and medical expenses. All other fixed kind of expenses—on a house or a car—should be planned after that. We remind our readers that this is only a guideline and actual planning might differ depending on individual’s circumstances.
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