What Is Retirement Planning? How it Works and Advantages

What Is Retirement?

After working whole life to earn money, a time comes when rest from the daily work routine becomes necessary. Retirement is a life stage when you decide to leave work and live off a pension or savings without any active work or income source. The standard age to retire in India is 60 years. However, one may retire early or extend their work life according to physical and mental health, financial planning, and personal preferences.

What Is Retirement Planning?

Retirement planning is the process of preparing your finances today so that you can meet your dreams and goals independently by the time you retire and live a comfortable life afterwards. It involves setting goals by assessing the current financial situation, measuring future expenses, and creating a strategy to build a sufficient corpus. The primary objective of planning is to maintain a similar living standard after retirement with financial security and independence.

How Retirement Planning Works?

Simply put, retirement planning prepares you for life post-retirement, not just financially but in all life aspects. The non-financial aspects include ways to spend time, place to live, and deciding the right time to retire. The key components and considerations to plan for retirement vary according to your life stage:

Early Life: In the early stages of work life, planning involves saving enough money for your golden years.
Mid of Your Career: When you are in the middle of your career, retirement planning includes accumulating enough income and assets.
Post-Retirement: This is the stage when you stop working and use up your savings and assets to lead a comfortable life.

You may take the help of professional financial advisors to decide when to retire, set goals, and find ways to achieve them.

Advantages of Retirement Plans

Retirement plans are crucial to achieving financial independence even when income sources stop. Some significant advantages of these plans include the following:

Financial Security: The best retirement plans offer a fixed income after you retire, substituting your pre-retirement salary. You may use this money to fund your daily expenses, travel, pursue a hobby, start a venture, and more post-retirement.
Tax Benefits: The Indian government provides tax benefits on certain financial instruments, allowing you to plan for the future and save money simultaneously effectively. For instance, National Pension System (NPS) offers a tax benefit of up to Rs. 1.5 Lakh under Section 80CCE and an additional deduction of Rs. 50,000 under 80CCD (1B).
Employer-Sponsored Retirement Plans: When you invest in NPS, your employer also contributes to your investments. In return, they receive attractive tax benefits. So, it’s a win-win situation for both.

Importance of a Retirement Plan

Planning for retirement is essential in many aspects, including the following:

Achieve Goals: When retired from work, you would like to travel to new places, pick up a hobby, or start a venture. You may also need money to send your child abroad for higher studies or host their wedding. With efficient planning, you can achieve these goals.
Better Quality of Life: You would not want to compromise your lifestyle after retirement. Today, you cover these expenses with your monthly salary. But after retirement, your pension should be sufficient to cover them.
Address Healthcare and Lifestyle Needs: Instead of depending on others in case of medical emergencies and other lifestyle needs, a retirement plan builds an emergency fund that keeps you prepared for expenses related to sudden events.

Steps to Retirement Planning

Follow these steps for efficient retirement planning:

Assess Current Financial Situation: The retirement plan you choose depends on your current financial situation, including your salary, regular expenses, disposable income, assets, etc.
Set Retirement Goals: Set goals you want to achieve by and after retirement and plan adequately.
Create a Realistic Budget: Create a budget according to your income, expenses, and goals.
Invest Wisely: Explore the various retirement plans and choose one that best suits your goals and lifestyle needs.
Regularly Review and Adjust the Plan: Regularly review your retirement plan and adjust it according to your changing needs.

Stages of Retirement Planning

Let’s look into the stages of retirement planning:

Early Career Planning: During this phase, you can take bigger risks and allocate a large pie of your portfolio towards growth-oriented plans.
Mid-Career Adjustments: You need finance to sponsor your child’s education, support ageing parents, repay loans, deal with diseases, etc. Based on these, you can adjust your retirement plans according to your budget and goals.
Nearing Retirement: As retirement nears, you must shift from aggressive investment strategies to dynamic asset allocation to balance the portfolio.
Post-Retirement Financial Management: In this stage, bid farewell to a fast-paced work life, accept cash flows from your retirement plans, and choose stable investment instruments for financial management, like fixed-term instruments and debt mutual funds.

Where Should You Invest for Retirement?

Retirement plans are available in many sizes and shapes, including the following:

Employer-sponsored plans
Traditional Individual Retirement Accounts
Roth Individual Retirement Accounts
SIMPLE Individual Retirement Account

You must diversify your retirement planning across different plans to spread the risk and earn higher returns. The plan you choose also depends on your retirement goals, lifestyle needs, and prevailing market conditions.

Factors to Consider While Planning Retirement

Consider these factors when planning for retirement:

Healthcare Costs: In old age, you must keep sufficient cash aside for possible healthcare costs.
Inflation and Cost of Living Adjustments: As the value of money will decrease in the future, consider inflation and adjustments in your living costs when choosing a retirement
Social Security and Pension Benefits: Ensure the plan you choose offers adequate pension benefits.

Why Is Retirement Planning So Important?

With a steady income source, you can resolve most problems and post-retirement challenges in the future, including healthcare costs and lifestyle expenses. You don’t need to depend on your kids and government schemes to live a comfortable and confident life. Simultaneously, you can achieve your long-term financial goals and leave a legacy for your kids.

Conclusion

You can maintain a confident and enjoyable life even after retirement if you plan for it well. Retirement planning at the right time helps you reap benefits and impacts your lifestyle significantly. The National Pension System (NPS) offers ample returns and pensions to achieve your retirement goals and handle emergencies without depending on others. With a wide range of benefits such as lump sum withdrawal at retirement, regular pension for life, tax benefits, etc., NPS lets you enjoy a happy and independent retirement life. So, start investing in NPS to cherish your golden years with peace of mind and financial freedom.