The plan and action of accumulating a certain corpus by the time you are of retirement age is known as retirement planning. It is a plan for living the choice of life you have dreamt for your silver years. This essentially means that you need to plan for a steady source of income for yourself at the time that you retire from your active career.
Planning for retirement is a very important financial decision you should make if you want to live a stress free independent life when your steady income from your job or work stops.
Your expenses that you incur today will not be the same when you retire, as with inflation, cost of living and all other expenses will only grow. Therefore your plan has to not only save for your retirement but also to invest in such a way that the future cost of living can be taken care of. For this, you need to start planning for your retirement as soon as possible, even if you find the retirement to be a remote happening.
1. The first step to plan your retirement is to decide what kind of life you see for yourself in your retirement. Do you want to live a quiet life in the countryside growing your own vegetables, or would you want to live in a community with like minded people. Would you like to spend time reading books, or travelling the world? The type of life you want to live will decide how much money you would need to save up for those days.
2. The next step is to take stock of your assets. Your value of your existing assets will make up some of your retirement corpus. The rest of the corpus needs to be built over the time you have left till your retirement.
3. A very important consideration while planning for your retirement is to take a look at how much time you still have till the time your retirement sets in. As a rule of thumb, the longer you have for your investment till your retirement, the larger the corpus you can build, helping you to come closer to your dream life. The investments you plan will have to be done with respect to the time left as well as your risk appetite.
4. The next step is to plan the investment avenues that can help you reach your goals. You can take your pick from a variety of options like, ETFs, NPS or mutual funds that may offer you the growth of equity or the assurance of debt. You may also consider investing in some good stocks for added returns.
National Pension Scheme or NPS as it is popularly known, was initially launched by the Government in 2004 with the objective of changing the pension of retiring Government employees from defined benefit to defined contribution plan. In 2009, the scheme was opened for citizens of India. The broader objective of NPS is to convert India from a pension less society to a pensioned society like many developed economies.
In NPS the contributors can decide where to invest their contributions to the National Pension Scheme. Investor can decide between two choices:-
This is for informed investors who can decide where they want to invest their NPS contributions. There are four asset classes that you can choose from, depending on your risk appetite and investment needs. You can invest in multiple asset classes.
This is for investors who cannot decide on their own, where they to invest their NPS contributions. This option is like a life-cycle fund, where the asset allocation depends on the investor's age. There are three options in auto choice:-
This account does not allow premature withdrawal before retirement (60 years of age). You can open a Tier I NPS account, with a deposit of Rs 500. You can claim tax deductions of up to Rs 50,000 from your taxable income under Section 80CCD by investing in Tier I account.
This account allows withdrawal prior to retirement age. You can open a Tier II NPS account, with a deposit of Rs 1,000. Tier I Account is mandatory requirement to open a Tier II Account. Tier II NPS account is a voluntary savings facility; you cannot avail Section 80CCD tax benefits in Tier II account.
Private sector employees can select among 11 pension fund managers. However, Government employees have to select from SBI Pension Fund, LIC Pension Fund and UTI Retirement Solutions only.
As per NPS rules, you can withdraw up to 60% in lump sum on maturity. This withdrawal is totally tax exempt, making NPS an extremely tax efficient investment option. The remaining 40% must be in re-invested in purchasing annuities (annuity is a fixed monthly sum received by the investor). Life Insurance Corporation of India (LIC) is the default annuity service provider, but you can also choose from 13 other annuity service providers empanelled with PFRDA. The annuities received by you, will be added to your income and taxed as per your income tax rate.
If you want to open an NPS account, do contact us at MC Financial Services.
