What is a Retirement Fund?
Retirement fund means building a corpus which would be able to take care of your expenses after retirement. You can create a retirement fund by saving up when you are actively working. You can set aside a part of your income and allocate this saving to a suitable avenue like deferred life insurance annuity plans or ULIPs. These plans can help in building a retirement fund which can be used to generate wealth or a regular source of income after retirement.
Tips to Secure a Stress-Free Retirement Fund
There are various ways in which you can save up for retirement. However, when creating a retirement fund, consider the following tips so that you can create an optimal corpus to meet your financial needs in golden years.
Estimate Post-Retirement Expenses
The hard fact about life is, that post-retirement, regular income stops, but expenses don’t. Major retirement expenses include monthly household expenses, medical expenses, vacations or family visits etc. Future expenses must be carefully projected so that the arrangements can be made while the person is still working.
Balance between Spending & Savings
Typical human tendency is, to spend more during early years. This needs to be attended as soon as we start earning. Whatever is your income, every young person should learn to live within his/her means in order to avoid unnecessary spending.
Keep an Eye on Effect of Inflation
Inflation greatly effects retirement planning. So, a person should invest in such a manner that he/she is able to hedge against the effects of inflation.
Invest Smartly
There are several financial assets where one can put in money regularly till retirement. Some people think that traditional pension plans are a good way to invest and save, but there’s a catch. Traditional plans are inclined towards investment in debt funds as they assure a guaranteed sum assured at the end of the policy tenure. The other alternative could be unit-linked plans. A few reasons why you should opt for ULIPs over traditional retirement plans may help you change your thinking.
Higher returns
Picture this…Over 30 years, INR 10,000 invested in the Sensex would have turned into INR 5 lacs. But most investors haven’t made the most of the market’s returns. Since 1986, when the Sensex was first published, it stood at roughly 550 (with a base value of 100 dating back to 1979). Today, it stands at roughly 29,000, implying a gain of 52 times over 31 years. In compounded terms, that is a return of 14 percent, not including two percent dividend.
ULIPs offer a whole host of high, medium and low risk investment options under the same policy. You can choose an appropriate policy according to your risk-taking appetite.
In a ULIP plan, your returns are expected to be much higher as the money is invested in equity markets. Through ULIPs, thus, you can build a big corpus by the time you retire.
Keep your eggs in different baskets
ULIPs also gives you the choice of choosing your investment options. So, if you are not comfortable with the idea of investing your money in equity markets, you can choose to invest in the debt market through a ULIP.
Staying Invested
In ULIPs you can increase your investment through top ups. However, you need to pay a premium allocation charge on the top-up premium. It is also advised that one should regularly top up their annual premium by an additional 15 to 20% in order to reach their retirement corpus goal.
Key Features of a Retirement Fund
Some of the salient features of a retirement fund investment are as follows –
Lower risk exposure
Whether you opt for traditional deferred annuity plans or ULIPs, you might keep the risk exposure limited to ensure capital preservation and stable growth. While traditional plans are not exposed to market risks, ULIPs have some element of risk which can be minimized by selecting a suitable fund and switching between funds with changing market movements.
Aimed for long-term growth
Retirement funds usually have a long-term horizon to help you accumulate a decent corpus for your retired life. While annuity plans offer a flexible tenure, it is recommended to choose a longer term to give your savings time to grow.
Creates a source of regular income
Life insurance annuity plans provide annuity payouts to create a regular source of income. Deferred annuity plans first let you accumulate a retirement fund and then receive annuities after vesting. However, immediate annuity plans pay annuities immediately after you buy the plan.
Different payout options
When it comes to annuity payments from a retirement fund, there are different options to choose from. You can choose single or joint life annuity with even the option of return of the purchase price.
Tax benefits
Life insurance annuity plans not only help in building a retirement fund, but they also offer tax benefits. The premiums paid for deferred annuity plans are allowed as a deduction under Section 80CCC up to ₹1.5 lakhs, applicable under old tax regime. On vesting, you can commute a part of your corpus as tax-free income and use it for your financial needs.
How a Retirement Fund Works?
The working of a retirement fund in India depends on the type of life insurance annuity plan that you choose. Let’s understand how.
- In a deferred annuity plan, you first pay premiums and build up a retirement fund over the policy term.
- While traditional deferred annuity plans help in building a stable corpus, ULIPs help you earn market-linked returns.
- On vesting (maturity), you get different options to use the vesting benefit. You can commute a part of the accumulated retirement fund and use the remaining to take annuities.
- Once the annuity payment starts, it continues depending on the type of annuity payout selected.
- Under immediate annuity plans, you use the retirement fund to buy the plan. Thereafter, annuity payouts start immediately.
So, you can assess your financial needs and choose a plan for retirement funding.
Smart Ways to Invest in a Retirement Fund
Some useful tips for retirement fund investment are as follows –
- Assess the type of retirement fund you want to buy. If choosing life insurance annuity plans, assess the type of plan that would help you save up for retirement.
- Assess the time to retirement, i.e., the number of years after which you would retire. This would help you find a suitable tenure for the annuity plan.
- If you are nearing retirement, you can choose immediate annuity plans to secure annuity payouts.
- Set up auto-debit mandates on your bank account for regular premium payments so that you don’t miss the due date and your retirement corpus can grow steadily with regular investments.
Why Should You Invest in a Retirement Fund?
A retirement-oriented life insurance plan makes sense to create a retirement fund in India because of the following reasons –
- You can choose from different types of plans depending on your goals and risk tolerance level.
- There are both deferred and immediate annuity plans that suit individuals who are planning for retirement and even those who are nearing it.
- If you choose ULIPs, you can enjoy the flexible benefits of partial withdrawals, switching of funds, top-ups, etc. subject to policy terms and conditions
- There are tax benefits too that help in creating a tax-efficient retirement fund.
Lock-in Period for Retirement Funds
Retirement funds usually have a lock-in period which means the period during which withdrawals are not allowed. The lock-in period depends on the type of policy selected. If you buy ULIPs, the lock-in period would be 5 years. However, for endowment-oriented plans, mid-term withdrawals are not allowed. The policy benefits are accessible only on maturity or on demise of the life assured.
Key Factors to Evaluate Before Choosing a Retirement Fund
When choosing a retirement fund in India, here are some key factors to assess –
- Check the type of policy that you buy and ensure that it aligns with your risk appetite. For instance, if you prefer stable growth, you can choose traditional plans while if you want market-linked returns along with life cover, ULIPs can be a good choice.
- Know the time period for which you want to save.
- Check the coverage benefits of deferred annuity plans.
- Choose from various annuity payout options such as life annuity, joint life annuity, annuity with return of purchase price, etc., based on your financial needs.
- Check the premium affordability so that you can pay the premiums comfortably.
Understanding the Risks Involved in Retirement Funds
There are some risks involved in retirement fund investment in life insurance annuity plans. These include the following –
- In the case of ULIPs, there would be market-related risks depending on the type of fund that you choose.
- There is a risk of inflation too which might reduce the purchasing power of your retirement fund.
- There is a liquidity risk too. In ULIPs, liquidity is restricted during the lock-in period. In traditional plans, liquidity can be a concern.
Key Takeaways
- Retirement fund means saving up and creating a corpus for retirement so that you can be financially independent even in your golden years.
- To save for a stress-free retirement, start early, assess your retirement age, factor in inflation, stay invested over a long-term period, and diversify
- Some of the features of retirement funds include flexibility, long-term focus, different payout options, tax benefits, etc.
- When choosing a retirement fund, assess your needs and risk appetite and then choose the right type of life insurance plan.
Conclusion
Retirement can mean a loss of income if you don’t plan ahead. However, when you plan in advance and save up to create a retirement fund, you can have a financially independent life. Life insurance plans offer deferred and immediate annuity plans that can help you build a retirement fund and also secure regular annuities. So, assess the plans, choose a suitable one and start building a retirement fund as early as possible.
FAQs
What is the best investment option for building a retirement fund?
The choice of investment depends on your needs and risk profile. You can choose life insurance annuity plans to build a retirement fund or other types of plans depending on your needs.
Which type of fund is most suitable for a retired individual?
If you are retired, you might choose an immediate annuity plan that offers immediate annuity payouts right after you buy the plan.
How can I start investing in a retirement fund?
You can start investing in a retirement fund online or offline. Choose the plan you want to buy, fill out the proposal form, submit it for underwriting and pay the premiums once the proposal is approved.
Do retirement funds come with a lock-in period?
Yes, there might be a lock-in period in some retirement plans. For instance, ULIPs have a lock-in period of 5 years.
Is investing in a retirement fund a good decision?
Yes, it is a good decision. This would help you create a retirement corpus for old age and be financially independent even when you stop working.
