Unlike government employees, who get pension after retirement, one of the major concerns of the private sector employees is to secure a source of regular income once their salary income stops.
If you plan early, you may achieve your goal easily with lower investments.
Unlike government employees, who get pension after retirement, one of the major concerns of the private sector employees is to secure a source of regular income once their salary income stops. So, if you are a private sector employee, it is very important for you to go for pension planning as soon as possible.
If you plan early, you may achieve your goal easily with lower investments as what makes compound interest work best is time.
Another uncertainty in pension planning is the interest rate. With the aggressive rate cuts by the Reserve Bank of India (RBI), the rate of interest on fixed deposits (FDs) has already fallen to near 6 per cent and that of immediate annuity plans (e.g. Jeevan Akshay) to near 5 per cent. So, the rate of interest available at the time of retirement is uncertain.
The first step of pension planning is to estimate the amount of pension needed to sustain just after retirement. Inflation and the years of service before retirement are the major factors that determine the pension need.
If you are 40 years old and spending Rs 40,000 per month, you will need Rs 87,614 per month to sustain after retirement. The amount of monthly expenditures will also rise along with the rate of inflation even during the retirement period.
Size of Retirement Corpus
If you want to sustain solely on the interest you get on the amount invested, the size of the retirement corpus will vary depending on the prevailing rate of interest. If you get just 4 per cent interest, to get Rs 87,614 per month or Rs 10,51,364 per year, the size of retirement corpus needed will be Rs 2,62,84,200 or about Rs 2,63,00,000.
On the other hand, if you get 8 per cent interest, you will need just half the amount or about Rs 1,36,50,000 to meet the requirement.
The amount to be invested will depend on the targeted retirement corpus, compounded annual growth rate (CAGR) and investment period.
There are many investment options available, some are equity bases, some are guaranteed, some have regular investment options, while in some you need to invest in lump sum.
Equity-oriented Mutual Fund
To have a retirement corpus of Rs 2,63,00,000, you need to accumulate about Rs 2,92,11,111 as you need to pay 10 per cent tax on capital gains over Rs 1,00,000.
Assuming a CAGR of 12 per cent, you need to invest Rs 31,756 per month or about Rs 3,81,500 every year.
Level of income tax also plays an important role. If your post retirement income comes in the 20 per cent tax bracket, your monthly SIP in equity-oriented MF should be about Rs 39,698 i.e. yearly Rs 4,76,378. The monthly SIP will further rise to about Rs 45,371 i.e. Rs 5,44,452 per year, if you fall in the 30 per cent tax bracket.
National Pension System (NPS)
Assuming a consistent CAGR of 10 per cent, you need to invest Rs 36,327 per month or Rs 4,36,000 per year in NPS.
If your post retirement income is in the 20 per cent tax bracket, the investment amount will rise to about Rs 45,408 per month i.e. about Rs 5,44,900 per year. In case you fall in the 30 per cent tax bracket, the investment amount will become about Rs 51,895 per month i.e. Rs 6,22,742 per year.
Annuity plans are of two types – immediate annuity and deferred annuity – in which you may make lump sum investments.
You may invest the accumulated retirement corpus in an immediate annuity plan to get regular income.
If you have lump sum capital, you may also try deferred annuity plans. For example, by investing Rs 60 lakh (Rs 61,08,000 including GST) in the deferred annuity plan Jeevan Shanti for a deferment period of 20 years, you may get guaranteed monthly annuity of Rs 87,744.
If your post retirement income is in the 20 per cent tax bracket, the lump sum investment amount will rise to Rs 75 lakh and further to Rs 85,75,000 if you fall in the 30 per cent tax bracket.
Guaranteed Money Back Plans
Another option you have to get a guaranteed annual return is through guaranteed whole life annual money back plans. For example, whole life annual money back endowment plan Jeevan Umang offers a guaranteed 8 per cent annual money back on the basic sum assured as survival benefit till the life assured attains the age of 100 years once the premium paying term is over. The options of premium paying terms under the plan are 15 years, 20 years, 25 years and 30 years, which you may choose as per your convenience.
To get Rs 10,51,364 per year, you need to have a basic sum assured of Rs 1,31,42,050. To get a sum assured of Rs 1,31,50,000, you need to pay a monthly premium of Rs 58,683 or annual premium of 6,89,830 (excluding GST) for a premium paying term of 20 years.
The other benefits of this plan is that the money back is tax free in the hands of the life assured, and bonus continues to accumulate even during the money back period, resulting in a maturity value of about Rs 16 crore at the current bonus rate if the life survives till 100 years of age.
There will be no effect of income tax level, as the money back is tax free.