Retirement planning is crucial for financial stability and independence in old age. It entails deciding on retirement objectives, and calculating how much money is required to reach those goals. Why should an individual have a retirement plan? How to ensure a comfortable lifestyle post-retirement? With a higher life expectancy and rising costs, why it has become essential to plan for a secure retired life?

Why should an individual have a retirement plan?

With a higher life expectancy, the increasing trend of nuclear families, rising inflation, and healthcare costs, it is essential to plan for a secure retirement life. Upon retirement, the regular income ceases to come in, and the only source of income is the savings accumulated over the years. This is why each one of us needs to have a well-thought-out retirement plan customised to one’s vision and aspirations for life after retirement.

Retirement planning comprises two phases. The first phase is of accumulation, which is the phase when one is creating the corpus from which one can then dip into for the second phase which is income generation for life after retirement. Planning for both phases is important for effective retirement planning.

Retirement can be a beautiful phase of life provided one is adequately prepared for it. This is where retirement planning comes into play.

How should one arrive at a corpus that would ensure one continues with the current lifestyle post-retirement?

The two key factors are the timing i.e. when does one plan to retire and the lifestyle that envisages for life after retirement. Once these two factors are known, one needs to apply a factor to account for inflation. For example, if the current lifestyle costs an individual ₹50,000 per month and retirement is 10 years from now, a similar lifestyle would need the same ₹50,000 compounded by 5-7% over a 10-year period, which in this case would be anywhere between ₹85,000 to ₹1 Lakh per month. This corresponds to an annual income of around ₹12 Lakh.

Now, the corresponding corpus should be such that it yields a monthly “interest” equal to this amount. Going by the above example, if one were to assume an interest rate of 6%, then the corpus that needs to be created to get an annual interest of ₹12 Lakh would be around ₹2 Crore.

While this is a simplistic example, it does outline the critical steps involved in retirement planning, which is visualizing the timing of retirement, income requirements after retirement, and the corresponding amount of corpus that needs to be created.

What are the upcoming trends in the industry and how is product innovation done?

With the growing popularity of retirement planning, the demand for annuity products has increased since individuals are specifically looking for products that are insulated from market volatility or fluctuations in interest rates.

There is an increasing realisation that one needs to have products that can provide income for as long as one lives, and we have seen strong demand for annuity products from Insurance companies since they address the key question of “Will my retirement savings last as long as I will.”

Individuals are looking for annuity products that would allow them to make regular contributions and systematically build retirement savings. With increasing aspirations and “young at heart” retirees, there is increasing demand for annuities that give periodic extra payouts, which can help them plan for something more than living expenses. On the other hand, there is also demand for annuity products that will give extra income in case of any aging-related health conditions that require everyday care and support.

So, overall this space is going to see a lot of product innovation as more people enter the phase of retirement planning.

What should be the ideal inflation one should keep for post-retirement planning?

A broad rule of thumb could be that one’s expenses will pretty much grow with the rate at which the country grows.

The key question to ask is, “What will my life be like after retirement?”. Would one be staying independently or with one’s family? Which city would they be living in? And so on. Factors like these will have a significant impact on one’s living expenses. While it may be difficult to have a definitive answer to these questions when retirement is a long time away, but the more concrete the answers to these questions, the better will be one’s ability to size up the requirements for life after retirement.

What should be the medical inflation one should keep for post-retirement planning?

Medical and healthcare costs are a very important element of post-retirement living expenses. Studies reveal that almost 12%-15% of expenses after retirement could be for normal healthcare.

Healthcare inflation in India is around 14%. Therefore, while planning for retirement, it is essential, as part of the retirement savings plan, to have a dedicated fund for healthcare expenses that is invested appropriately to keep pace with inflation. Ideally, one should start saving early and commit a fixed sum every month over a long period. Also, one should have appropriate health cover that can take care of any hospitalisation-related expenses so that such events do not cause a significant dent in the corpus meant to take care of the everyday living.