Use power of compounding to maintain your living standard post retirement

Retirement is a reality that we all have to face some day or other. But most Indians put off planning and saving for retirement till it is too late, that is, till they are in their late forties or even early fifties.

But just 10 or at best 20 years of savings will not help you to build a corpus for your twilight years, especially if you do not wish to compromise on your current lifestyle.

According to experts, the ideal age to start planning and saving for retirement is when you start working. As one is younger, with fewer responsibilities, it is possible to save more. ``The earlier you start the better as you get the benefit of the power of compounding,'' says Sanjiv Bajaj, managing director, Bajaj Capital.

But if you miss the bus then, make sure you start saving for retirement between ages of 30-35. "After 40 years, it would be a challenge to build a decent corpus for retirement,'' cautions Bajaj.

"Within the private sector, only about 8% of retirees receive a pension today. The clarion call for the retirement funds industry, therefore, is to considerably expand its coverage," according to a recent study by CRISILInsight.

Even in the public sector, the 'defined benefit' plans have been replaced by the 'defined contribution' plans. "Thus, people need to save more for retirement now as the mandatory 10% contribution towards provident fund (matched by employer) is not sufficient for retirement needs,'' says Aalok Bhan, director and head, product solutions management, Max Life Insurance.

Once you decide on saving for retirement, you can choose from three options – pension plans floated by insurance companies or mutual funds and the National Pension Scheme (NPS).

"The advantage of the mutual fund route is the tax benefit, especially if the investments are mainly in equities,'' says Bajaj. Also, investors have the option to withdraw funds through the Systematic Withdrawal Plan (SWP). The main attraction, according to Bajaj, is that there are no restrictions (as in insurance products) at the time of maturity.

In the case of retirement plans by life insurers, the advantage is that there is a waiver of premium benefit in case of a calamity. "In such instances, the insurance company pays the premium in place of the insured person and the wife would get the funds on retirement as per the plan,'' says Bhan. Max Life Insurance was the first to introduce the waiver of premium benefit plan but most insurance companies now offer products with this facility.

You need to decide what plan suits you depending on your age and risk appetite. Those who are starting early can opt for plans that invest more in equities while those who are looking for safety can invest in traditional plans that are low risk as they invest about 85% in debt.

The recent Rs 50,000 exemption for investments in pension funds is expected to give a boost to the retirement industry, especially to NPS.

"However, in case of NPS, the distribution issues need to be addressed first. As of today, it is very difficult to co-ordinate and manage your investments in NPS,'' say sources. If the exemption is extended to pension plans of life insurers and mutual funds, it could lead to a big boost to the pension industry.