The joint family structure was a bulwark of Indian society for much of its history. This structure had an inherent social security system that took care of the elderly. Industrialisation and increase in urban migration in the last few decades has, however, made nuclear families more popular. This fundamental shift in the social fabric has created the need for the elderly to build financial security for themselves and for the younger generations to prepare for their future.

According to the United Nations Population Fund and HelpAge India, by 2030, close to 12.5 per cent of India’s population will be over 60, and by 2050, this number will increase to 20 per cent. In the absence of adequate social security systems in India and rising inflation, it is crucial for the current working population to embark on a retirement planning journey.

Start early

The first step is to arrive at a suitable retirement income. To do that, identify your current and future income, determine your time horizon, forecast expenditure and accordingly choose financial instruments that will help you arrive at that number.

It is important to lay the groundwork as early as possible to reap the benefits of compounding. People starting early have more time on their hands to accumulate their desired retirement capital at a comfortable pace than those who start late.

For instance, consider a 30-year-old and a 40-year-old working professional. Both are aiming towards building a retirement capital worth Rs 1 crore by the time they reach 60. Assuming the rate of return to be 8 per cent, the 30-year-old professional would have to approximately invest Rs 1 lakh annually for the next 30 years to reach Rs 1 crore. His total investment would be Rs 30 lakh, whereas our 40-year-old has to shell out Rs 2 lakh annually for the next 20 years, making his total investment reach Rs 40 lakh.

Apart from starting early, acute planning and discipline is needed to succeed in this endeavour. Wrapping up your big-ticket expenditure and closing all your loans such as home, vehicle, personal etc before your retire is vital, as carrying debt into your retirement could lead to a major drain on finances. In addition, give due importance to legacy planning in terms of how much to leave for your spouse and/or children.

The average life expectancy for both men and women has inched towards 70 years and is projected to climb up further in the coming decades. Therefore, the retirement planning process should be taken very seriously as it will ensure a regular source of income to lead a financially independent retired life.

Life insurance companies have developed various tools and calculators which aid individuals in estimating the corpus required to be built and the subsequent income stream. It is common knowledge that anyone who survives till 80 years has to put aside a lot more savings than someone who survives till the age of 70 to avoid the risk of outliving their savings. Annuity products offer a guaranteed regular income during the lifetime of an individual.

Annuity products

Life insurance firms provide various pension and annuity products. Broadly, there are two types of annuity products — immediate and deferred annuity.

Immediate annuity: The premium is paid in a lump sum and the policyholders begin to receive pension immediately in the form of a guaranteed payout at regular intervals for the rest of their lives.

This plan in particular is designed for the 60-plus population looking to remove the reinvestment risk attached to fixed-income instruments. As the interest rates fluctuate every quarter, the elderly relying on these instruments might have to deal with the risk of getting a lower rate of interest at the time of reinvesting the principal.

Under immediate annuity plans, the policyholders have a steady amount of cash flowing in as long as they live, irrespective of interest rate fluctuations in the fixed income market.

Let us understand it with an example. Venugopal Reddy, after retirement as a manager in a private manufacturing company, has been living in Vizag since 2014. On retirement, he invested all his provident fund and gratuity money in a financial instrument giving fixed monthly interest. The rate of return offered then was 8.80 per cent. It was enough for Reddy to meet his financial needs. Cut to 2020, the rate of return has declined to 4-5 per cent, reducing Reddy’s monthly income by half. If Reddy had invested a sizeable chunk of his retirement wealth in a life insurance immediate annuity plan, he may not have faced this issue because of the plan’s fixed rate of return.

There are various options offered under the annuity plan by life insurance companies. One of the most preferred one is called ‘‘Joint life with return of purchase price’’, where the policyholders will get the pension amount as long as they are alive. After the demise of one, the spouse will get the same pension amount. After the demise of both, the legal heir would inherit the lump-sum amount which was paid at the time of purchase.

Deferred annuity: Under this plan, a policyholder can invest a lump-sum now and choose to start the pension income in the near future. Typically, in such products, the policyholder can choose to ‘‘defer’’ the start of pension for up to 10 years. It is best suited for people who are in their late 40s and early 50s, who are working but for whom retirement is in the foreseeable future. The key benefit is the guaranteed income for whole life and the fact that the policyholder knows exactly how much income he or she will be getting at the time of buying the policy.

Retirement may be the end of a career but it is also the start of something new. It is an opportunity to experiment and explore, to engage in pursuits you care about and perhaps to reinvent your legacy.

The writer is chief distribution officer, ICICI Prudential Life Insurance Company