Readymade pension plans vs customised plans





A comprehensive retirement plan should consist of a bundle of schemes and not just a single scheme

Ramalingam K

The existing pension plans / retirement plans in India are from the insurance companies. They are available in the form of traditional products or in the form of ULIPs (unit linked insurance plans).

Indian traditional retirement plan:

The traditional pension plan/retirement plan schemes from Indian insurance companies are expected to deliver 6% to 7% CAGR (compounded annual growth rate) as they are allowed to invest only in conservative avenues. This 6% or 7% is not sufficient to beat inflation.

Indian ULIP Retirement Plan:

The ULIP pension/retirement plans have huge front loaded charges. They also have higher regular running expenses and fund management expenses which pulls down the net return. That’s why market has rejected these products and they have become failures.

Customised retirement plan:

As a prudent investor, you should not rely on a single product or scheme for your retirement planning. A comprehensive and customised Indian retirement plan should consist of a bundle of schemes and not a single scheme.

Also you need to avoid schemes which deliver lesser return and schemes with huge charges. You need to select a combination of schemes which as a combination can deliver a decent inflation adjusted returns with low charges.

Schemes for pre-retirement plan in India:

A combination of term insurance, mutual funds and PPF will help you in creating a better pre-retirement plan.

Term insurance:

In case of any mishappening to you, your spouse’s retired life needs to be secured. This can be protected with adequate term insurance. Online term insurance policies are cheaper by 50% to 60%. So opt for online term insurance instead of an offline term insurance.

Mutual funds:

Equity mutual funds play a vital role in delivering positive inflation adjusted returns. Short term and medium term debt funds are better alternatives to fixed deposits as they can deliver better post tax return.

PPF:

Public Provident Fund (PPF) delivers around 8.8% tax free return per annum. It has a lock-in of 15 years. One can invest up to Rs. 1 lakh per annum. Safety and its tax free status makes this product a compelling option for an Indian pre-retirement planner.

Schemes for post-retirement plan in India:

A combination of schemes like POMIS (Post Office Monthly Income Scheme), Senior Citizen’s Savings Scheme, bank FD, mutual fund MIPs (monthly income plans) and debt funds could be considered for creating a post-retirement plan.

Creating a customised retirement plan

Let us think about how to create a comprehensive and customised retirement plan.

Lifestage:

In this step, as a retirement planner, you need to answer two questions. One is “How many years from now you are planning to retire?” and the other one is “Your Estimation of Post-retirement years”. Studies reveal that the average life expectancy of an Indian is 75 years. But it is advisable to assume 85 years as your life expectancy so as to make sure that you will be covered enough during your post retirement.

Expected retirement expenses:

Again in this step you need to have an answer two questions. The first one is “what will be retirement expenses in today’s cost of living”. Research reports show that approximately 70% of your current expenses will be your retirement expenses. The second question is “what would be the expected rate of inflation on these expenses”.

Expected retirement income:

The first question to be answered is “What is the expected amount to be received at the time of retirement from schemes like EPF, superannuation, pension commutation, gratuity?”. The second question to be answered would be is “What is the annual income you expect from the sources like pension schemes, rent, royalty?”.

Existing investments:

“What is the current value of the investments made towards retirement?” and “What is the expected return from these investments?” are the questions to be answered in this step.

Working out the retirement plan:

We are going to work out the retirement plan in this step with the answers from the earlier steps.

You need to find out the future value of the retirement expenses with the present value of retirement expenses, number of years to retire, and the inflation rate assumed.

The expected retirement income by way of rent, pension, royalty, etc need to be deducted from the retirement expenses (calculated in the point (a)) to arrive at the net retirement income to be generated from the retirement corpus.

Then the retirement corpus needs to be calculated by taking into account the net retirement income (calculated in the point above point), number of retirement years, inflation assumed post-retirement.

The retirement benefits like pension commutation, gratuity, superannuation, EPF needs to be deducted from the retirement corpus (calculated in the point (c)) to arrive the net retirement corpus required.

The monthly investment required to accumulate this net retirement corpus needs to be calculated taking into account the existing investments, and the rate of return from the investments.

The writer is the chief financial planner at Holistic Investment Planners

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