Rome was not built in a day! You can draw a parallel from this age-old pithy when you plan for your retirement. You must have a plan to save and grow that saving over the years so that you get a steady flow of money post-retirement and thus lead a comfortable retired life.
The concept of saving for retirement has another common ground with Rome. Annuity, as we know it today, dates back to the ancient Roman era when citizens kept lump-sum amounts in safe custody in return for a reliable stream of payments for a defined period.
This arrangement was termed, “annua”, which has now evolved to become “annuity”. However, this concept, quod est, is now referred to as “immediate annuity”.
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Modern consumers love the safety nets, called “guarantees” offered by sellers. Many companies even get customers to enter into extended support schemes called “Annual Maintenance Contracts (AMCs)” that give consumers peace of mind and comfort to the pocket.
Automobiles are covered by “motor insurance” whereas health is covered by “health insurance” to pay for expenses incurred to repair the vehicle or cover hospitalization. An annuity is also a type of guarantee to give you steady cash flow, post-retirement, for a defined period or sometimes until even the end of your life and that of your spouse as well.
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In legal parlance, an annuity is a contract between an insurance company and the person. The company is mandated to make periodic payments after a pre-defined date. In case the payments start immediately, the contract is called “Immediate Annuity'' and if the person invests money for a defined term after which the pay outs begin then the contract is called “Deferred Annuity”.
In the lesser-known type called the growing or increasing annuity, the cash flows grow at specific intervals of time. The saving period when you set aside a part of your income to build your retirement kitty is called the “Accumulation Phase” whereas the pay-out period is called the “Vesting Phase”.
In India, annuities are very popular financial instruments when planning for retirement. Considering the “assurance” that it provides and the risk (of outliving one’s income) that it mitigates, annuities are largely considered insurance products. Some other types of annuities widely offered by reputed insurers such as Canara HSBC Life Insurance are:
The amount of annuity can vary significantly based on your timing of payment. The plan that pays at the beginning of each period is usually more valuable.
Source: Investopedia
If you are offered Rs. 1 Crore today vs Rs. 10 Lakhs paid each year for 10 years, you will opt for Rs.1 Crore today without batting an eyelid. You are aware that the purchasing power of the same amount would go down in the future due to the impact of inflation.
If you are 40 years old and expect your post-retirement expenses to be approximately Rs. 90,000 per month, you can use the present value formula/calculator to calculate the amount that you must start saving now.
The present value of a future pay out represents the amount of money today, which, if invested at a certain rate of interest, would grow to the amount that you will need then. This process of calculating the present value of future cash flows is also called “discounting”.
C = Cash flow per period (pay out amount)
n = Number of payments
i = Rate of Interest
The amount to be invested each month during the “accumulation phase” is inversely proportional to the rate of interest. Most annuity plans allow you to start investing at the age of 40. Therefore, if you want to invest in annuity plans, you must put your money into some robust high-growth insurance plans until 40 before moving your funds into annuity instruments.
As annuity plans are one of the safest investments of all time, the focus is on capital preservation rather than aggressive growth. So, if you are looking for growth, investing directly in annuity plans may not be the best investment decision.
Yet, you can invest your windfall gains into deferred annuity plans and reinvest the annuity income if you do not need it. This way you can keep your capital safe and enjoy better growth as well.
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If you start investing Rs. 30,000 per month from the age of 40, and your investment gains an average interest of 7% per annum, you will accumulate approximately Rs. 1.6 Crores by the time you turn 60. At 6% per annum, this corpus can fetch you approximately Rs. 80,000 per month as a steady income stream post-retirement.
In a nutshell, you are investing Rs. 3.6 lakhs per year and getting a return of Rs. 9.6 lakhs per year.
Annuities are the best forms of savings if you are looking at safety, stability, and inflation-beating returns, in other words, post-retirement income stream.
For the ultimate peace of mind, you must invest your hard-earned money in insurance companies that have legacy and credibility in the market. After all, you are planning for several decades ahead-it is best to be in safe hands.
We bring you a collection of popular Canara HSBC life insurance plans. Forget the dusty brochures and endless offline visits! Dive into the features of our top-selling online insurance plans and buy the one that meets your goals and requirements. You and your wallet will be thankful in the future as we brighten up your financial future with these plans.
Annuity investments are usually exempted from taxation until withdrawals or periodic payouts start. This investment not only offers a steady source of income after your retirement but comes with significant tax advantages.
Let’s explore the tax benefits of annuity plans:
Moreover, if you withdraw money from your annuity plan before the age of 59½, you may incur an additional 10% tax.
An annuity calculator is a convenient and easy-to-use online tool that can help you estimate your periodic payouts after retirement. It takes into consideration various factors such as principal amount, interest rate, and duration, empowering you to choose the right investment plan and maximise your returns.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
