Why do I need a Retirement Plan?

Retirement plans provide you with financial security so that when your professional income starts to ebb, you can still live with pride without compromising on your living standards. Given the high cost of living and rising inflation, retirement planning has become all the more important.

India's average life expectancy is slated to increase to over 75 years by 2050 from the present level of close to 65 years. Lifespans have been increasing due to better health and sanitation conditions in the country. However, the average number of years of employment has not been rising commensurately. The result is an increase in the number of post-retirement years without regular income. Therefore it is more critical now than ever before to ensure regular income for life after retirement.

Is social security enough?

Ask most individuals about how they are likely to fare in post-retirement and the first thing they mention is the provident fund.

The public provident fund (PPF) or the employee’s provident fund (EPF) is unlikely to be enough for the individual let alone his family.

Even if we consider the provident fund, statistics reveal that only about 10% of India’s working population has any form of social security like provident fund. Self-employed individuals, professionals such as lawyers, doctors and accountants, employees in the unorganized sector have nothing to fall back on in an emergency.

What about inflation?

A big question to ask yourself is – will my post- Retirement Plans finances withstand inflation?

Inflation has a dual impact on your hard-earned savings. Inflation not only erodes your current purchasing power but also magnifies monetary requirements for the future. 

The above illustration shows how with each passing year your annual savings requirement would increase. For instance, if you are 30 years old and plan to retire at the age of 60, then, with current annual expenditure of Rs 3,00,000, you would need a corpus in excess of Rs 2,00,00,000 to maintain your living standards, assuming you live till 85 years and the inflation rate is 4%. To build this retirement corpus, you need to invest Rs 3,60,000 per annum in a retirement plan that offers 8% returns per annum. In case you delay planning your retirement by 5 years then the investment amount would increase to Rs 6,90,000 per annum.