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Benefits of Retirement Planning

According to the celebrated investor Warren Buffett, "If you don't find a way to make money while you sleep, you must work for the rest of your life”. This simple quote demonstrates the need to have a retirement plan as you cannot work forever.

A retirement plan is all about knowing how much you need to save to ensure that you can live comfortably for the rest of your life. While your retirement may seem like a long way off, there are many benefits of retirement planning at an early age. Learn more about why you need to start preparing and planning for retirement right now.

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Benefits of Retirement Planning

Top 10 Benefits of Retirement Planning

Benefits of Retirement Planning
November 07, 2024

Table of Content

 

Why Start Planning for Retirement Early?

Planning for retirement is like building a house. As creating a blueprint is the first step to building a house, you must identify your needs first to start preparing for retirement. This means that the earlier you get started, the more time you have to select the right investments, make the right decisions and give yourself more time to correct any mistakes.

Starting early also allows your investments to benefit more from the power of compounding. As more time goes by, your small initial investment grows exponentially through the accumulation of compound interest. Moreover, over the long term, the market tends to move in a positive direction despite short-term fluctuations. This results in more returns from your investments.

Another important benefit of retirement planning at an early stage is that you get more time to find good opportunities and take on more risks. Since most investment plans with the highest potential returns come with high risks, you need more time to get your desired returns and offset the effects of short-term losses.

You also need time to re-adjust your portfolio to adapt to changing market situations and select better investments. Early retirement planning reduces your stress as you have more than enough time to save for your future.

Key Benefits of Retirement Planning

Let’s understand the key retirement planning benefits:

1. Emergency Financial Safety Net

While you may have planned your post-retirement expenses, certain things are always out of your control. Unexpected events like home repairs, accidents and medical treatments can severely reduce your retirement corpus, leaving you unable to enjoy a good standard of living afterwards.

This is why you need to have a proper retirement plan that keeps a substantial buffer between the income you require and unexpected expenses. Having an emergency fund for the future is always recommended to stay prepared.

2. Investment Returns

With early and proper retirement planning, you can make better returns on your investments. An early start gives you more time to research and analyse different options in the market, and make necessary adjustments to your portfolio as and when needed.

Moreover, your money has more time to benefit from the effects of compounding. Compounding is the process where gains from your investment are reinvested to generate more returns.

3. Tax Benefits

 Retirement planning is essential for Tax saving. Your tax liability can include taxes on interest income, capital gains, rental income and so on. If these tax liabilities are not reduced, you can end up pushing your income into higher tax slabs.

There are many ways to minimize your tax liability. Consider these tax-advantaged account options to make the most of your retirement savings:

  • Investing in savings bank accounts, bank deposits, or post office deposits can benefit from deductions of up to Rs. 50,000 on the interests earned under Section 80 TTB in case of senior citizen.
  • You can claim tax deductions under Section 80C and Section 80CCD by increasing your investments in life insurance policies, Public Provident Fund (PPF) and National Pension System (NPS).
  • You can avail tax benefit on health insurance premiums paid up to Rs. 50,000 (in case of Senior Citizen) under Section 80D of the Income Tax Act1.
  • Any payment received in commutation of pension as a lump sum on vesting (maturity) of a pension plan is exempt under section 10(10A)(iii) of the Income-tax Act, 19611, subject to fulfillment of various conditions under the current income-tax law.
  • Consider investing in retirement-focused ULIPs and other savings product, as the maturity payouts received under these plans can be completely tax free under Section 10(10D) on satisfaction of the conditions mentioned under the section.
  • An exemption of long-term capital gain (LTCG) upto Rs 1.25 lac shall also be available annually for LTCG arising on ULIP plans

4. Cost Savings

The more you lower your expenses and obligations, the more funds you have to set aside for your retirement. It's advisable to save at least 10%-15% of your pre-tax income every month to stay on track with your retirement savings goals.

One way you can ensure disciplined savings is by selecting a systematic mode of investment, such as a Systematic Investment Plan (SIP) for mutual funds or a pension plan with automated payments.

5. Peace of Mind and Financial Freedom

When you are unprepared for your retirement, the future may seem to be dark and uncertain. One of the biggest benefits of retirement planning is that it gives you peace of mind and reduces your stress, as you know you can retire comfortably.

By saving and investing sufficiently, you get a financial buffer to spend money on things you want. You also stay prepared for inflation, rising healthcare costs, and other uncertainties of life.

6.  Inflation

Inflation, which is the increase in the price of goods and services over time, erodes your purchasing power over time. For example, if your current monthly expenses amount to Rs. 80,000 on average, a 6% yearly inflation rate will increase your expenses by nearly 10x to Rs. 8.23 lakh in 40 years.

The first step to deal with inflation is to set inflation-adjusted goals based on your current income and expenses. Then, curate a portfolio of inflation-beating assets and increase your contributions to achieve your goals despite the effects of inflation.  

7. Income Sources for Private Sector Employees Without a Pension

As private employees don’t have the same pension as their government counterparts, they need a proper retirement plan. There are a range of different options available for private employees, from government-backed Employees' Provident Fund (EPF) to private pension plans and mutual funds.

You can choose the right investment vehicle from the different options available based on your risk appetite, financial goals and retirement needs. It’s also a good idea to seek the help of a qualified financial advisor or retirement planner.

8. Legacy Opportunities

Planning for retirement does not only mean preparing your own financial security as you may want to continue caring for your loved ones. One of the benefits of retirement planning with a qualified expert is that you can ensure that your future generations will get a headstart in their lives.

With some estate planning, you can create a trust to distribute assets as per your wishes, minimise your tax liabilities and protect your assets using insurance.

9.  Early Retirement Option

Nowadays, many young people are actively and aggressively pursuing career success and savings goals so that they can retire early. To achieve financial independence at an early age, you need to carry out thoughtful planning, establish a budget plan, utilise multiple income streams and optimise your investment returns.

Retiring early gives you more time in your life to fulfil life goals like travelling the world, starting a new business and spending time with your loved ones.

10.  Safeguarding Your Assets and Property

Another benefit of retirement plans is that they allow you to protect valuable assets such as your residential and commercial properties, gold, personal vehicles and business. While you will want to continue owning and using your valuable assets for the rest of your life, you might have to resort to selling them off if you don't have enough cash in the future. That's why having a plan for investments and inflation is necessary.

How to Pick the Right Retirement Plan?

When it comes to picking the right investment options for a retirement plan, you should avoid investing without a well-defined strategy. A structured retirement plan allows you to select the right investments for your retirement needs and build a substantial corpus for your life goals. Here’s how you can pick the right plan:

  • Know What You Need

A retirement plan begins with determining your financial needs in the future. The process involves estimating your future expenses, liabilities and the funds required for future life goals. Then, you need to assess your current income sources, expenses and savings to understand whether you can fulfil your retirement goals.  

  • Set a Time Frame

Once you have determined how much you need to invest, assess the time frame over which you need to stay invested. Factor in the effects of inflation, your future cash flows, expenses and liabilities and life expectancy to understand your investment horizon and investment needs. It is advisable to have a long time between the time you start investing and your retirement age.

  • Set Your Investment Goals

After establishing a time frame, you need to figure out your financial goals and post-retirement goals to estimate the required funds. Create a post-retirement budget by estimating the cost of essential items like groceries, clothing, housing and transportation. Next, add healthcare costs, insurance premium costs, and the amount of funds required for emergencies.

Finally, consider the cost of things such as entertainment, vacations, and other luxuries of life that you can do without but want to attain. This will tell you how much you need to invest and in which assets you should invest.

Why Is Retirement Planning Necessary?

Saving for retirement as soon as possible gives you more time to choose the right investment, benefit from the power of compounding and ensure a steady stream of income in your golden years. One of the most important benefits of retirement planning is that it gives you a comprehensive view of your life goals and sets you on the path to achieving them.

Here are some more reasons why retirement is necessary:

1. Money Safety

You need a substantial sum of money to cover basic necessities, emergencies and liabilities for the rest of your life. With a proper retirement plan, you have a financial safety net that ensures enough funds to not only secure necessary expenses but also fulfil your long-term goals.

2. Living Longer

Retirement planning minimises your long-term health risks, as it provides you with enough funds to proactively keep yourself healthy. By building a large nest egg, you cover the expenses of regular doctor visits, medical treatments and health emergencies. Moreover, you reduce your stress and stay confident about your future.

3. Inflation

While inflation is one of the biggest challenges when it comes to future expenses, you can turn it to your advantage with prudent retirement planning. Since asset prices increase over the long term, you can stay invested over a very long time to maximise your returns from the market. Moreover, by choosing inflation-beating investments, you can make sure to preserve the value of your money.  

4. Health Expenses

One notable benefit of retirement planning is that helps you stay prepared for future medical expenses. Some of the retirement planning strategies you can incorporate include keeping a separate health fund, investing in health insurance and monitoring your health. You also need to save a sufficient sum of money to cover future healthcare expenses after adjusting for inflation.

5. Quality of Life

Retirement planning is necessary to stay on track of your savings and investments. This ensures that when you retire, you are able to not only cover basic necessities but also discretionary spending on vacations and entertainment to stay positive and cheerful in your post-retirement years. You can also spend money on goals like starting your business or working on your hobbies to maintain a sense of purpose in your life.

6. Reducing Family Stress

If you want leave behind a legacy and look after your loved ones after retirement, you need to plan ahead. You will need to accumulate substantial wealth to cover the needs of your family members in addition to your own necessities. However, with a robust retirement fund, you can maintain self-sufficiency and protect your assets like home, car, etc.   

7. Being Flexible with Changes

One benefit of participating in retirement planning at an early stage is that you have enough time to prepare for all possible contingencies. By keeping a separate contingency fund to cover unforeseen situations like relocating expenses, natural disasters and medical emergencies, you can ensure stability in the face of changes.

8. Tax Efficiency

By starting your retirement plan as soon as you have taxable income, you can save a massive sum of money over time. You can optimise your tax situation by taking the help of a qualified professional. They can advise you on which tax-saving investments to choose and how to maintain tax compliance. With a proper tax plan, you retain more of your income for retirement savings.

Summary

Getting a comfortable retirement is a goal that many of us have. However, reaching this goal comes with many challenges including the need for substantial savings, inflation, healthcare costs and the need to look after your loved ones. Retirement planning is necessary to ensure that you stay on track of your retirement goals and stay fully prepared for what the future has in store for you.

FAQs on Benefits of Retirement Planning

What are the benefits of retirement planning?

There are many benefits of retirement planning. It helps you pay for basic necessities, discretionary expenses, healthcare costs, and obligations like mortgages, credit card debt, and more. By planning your retirement early, you also maximise returns from your investments and tax benefits and offset the effects of inflation.  

Why save for retirement?

The most important reason to save for retirement is that you will likely be unable to keep working forever. Due to the effects of aging, it's unlikely for most people to be able to continue working in their 60s and 70s. Moreover, many people are not sufficiently covered by government-sponsored social security schemes.

Why do people want retirement?

Many people want to retire at a certain age as they cannot physically continue working to earn an income. People who find work to be stressful need to retire to spend their time on hobbies, travel, social activities and community service. Having a retirement fund gives people the freedom to spend their time as they want to.

When to start retirement planning?

The ideal time to start planning for your retirement is as early as it's possible. You should ideally get started in your 20s when you get your first as it gives you the most time to build a substantial corpus and maximise tax savings.

How Much Should I Invest for Retirement?

Some experts suggest saving at least 15% of your annual income every year, including bonuses and incentives to save a sufficient sum for retirement. Other experts suggest that your total retirement corpus should be at least 30 times your annual expenditure. Finally, another rule says that the ideal corpus is at least 7-8 times your last drawn salaries.

Related Articles:

References  

https://www.hdfclife.com/retirement-and-pension-plans/retirement-planning#:~:text=Retirement%20planning%20is%20not%20just,healthcare%20costs%2C%20and%20other%20expenses

https://www.investopedia.com/terms/r/retirement-planning.asp

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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1.  Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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