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Why should you Consider Inflation when Planning Retirement?

dateKnowledge Centre Team dateMay 27, 2021 views212 Views
Retirement Planning & Inflation | Best Retirement and Pension Plan

Inflation, in India, is measured using two standard indicators known as the Wholesale Price Index (WPI) and Consumer Price Index (CPI).

You buy a 500G packet of filter coffee powder for Rs. 400. In another 10 years, the same packet of coffee powder may cost Rs. 700. This implies the cost has grown at almost 6%. In simple terms, this % in growth of the cost of products is called Inflation. The same Rs. 400 that can fetch you a 500G packet of coffee today will be sufficient to buy only 285G of coffee after 10 years.

In a nutshell, the buying power of your money goes down with time. To ensure your hard-earned money does not erode in value over time, the money must grow faster than the rate of inflation. The question is how inflation impacts your retirement plan. Let us delve deeper to understand.

How your Retirement Plan is Impacted by Inflation?

Considering the overall inflation rate to plan for retirement could be detrimental. You must consider what will remain relevant to you over the years. If healthcare costs increase by 10% year on year, this can impact you in your old age.

The health insurance, if any, may not be sufficient on one hand and your savings may run dry sooner than you expected. Healthcare costs are also steadily increasing and are now above the average rate of inflation. Healthcare accounts for a major portion of senior citizens’ living expenses.



Also, you must be cognizant of these factors when you invest in funds and plan for your retirement kitty. If you invest in funds that give you an average of 7% returns when the cost of food is growing at 9%, it is evident that your savings will not help you lead the lifestyle that you are leading now.

Some insights into how inflation can impact your retirement plans given below so that you can start planning early:

1. Lowers Returns on Investments:

Your investments in Provident Fund (PF) and Public Provident Fund (PPF) may give you assured returns of 8.5% and 7.1% respectively. But the real growth is calculated by factoring in the rate of inflation.

If the current rate of inflation is 6%:

  • Real Return from PF holding =8.5%-6%=2.5%*
  • Real Return from PPF holding=7.1%-6%=1.1%*
  • * Approximately

Learn how saving at an early age will help you during retirement.

2. Lower Purchasing Power:

The above example is simple and considers only the average rate of inflation. But as mentioned earlier, if food inflation is specifically considered, the real return could be lower or even negative

If current rate of food inflation is10%

  • Real Return from PF holding =8.5%-10%= (-)1.5%
  • Real Return from PPF holding=7.1%-10%= (-)2.9%

A negative return implies that your money is getting eroded over time and cannot buy even those things you can afford today.

3. Difficult to Estimate Future Costs:

The rate of inflation is an aggregate of rates across different sectors, products, and locations. The aggregate number is an average and may not be relevant unless you look at specific items or sectors that impact you.

Inflation is dependent on several factors that include resource availability, geopolitical influences, market volatility, political stability, and general well-being in the region. Past rates are not an indicator of the future and even if so, the rates have widely fluctuated (Source: Statista) between a high of 13.48% in 1991 and a low of 3.83% in the year 2000.

Invest in Saving and Investment Plans to Beat Inflation

Keeping these factors in view, it would be wiser to invest in asset classes that will help you generate wealth, assure your family of reliable financial support, in case of exigencies, and allow you to lead a stress-free retired life. Investment-linked insurance plans have proven to be comprehensive in providing an all-round financial backup because of their innate flexible design.

4 Saving and Investment Plans by Canara HSBC Oriental Bank of Commerce Life Insurance

Canara HSBC Oriental Bank of Commerce Life Insurance offers various saving and investment plans that you use to build your retirement corpus. The best thing about these saving plans is they take inflation under consideration. Most of the plans are flexible and they allow you to increase the sum assured keeping in account the growing needs of an individual.

1. Invest 4G

Invest 4G Plan is one of the most flexible and efficient investment options to aggressively grow your investment. In this plan, you can invest in a mix of equity and debt instruments so that you can take advantage of market movements and benefit from equity growth.

This plan helps you benefit from market growth even when you are not following the markets continuously:

  • The auto funds rebalancing feature moves your money across funds, each quarter, as per your defined allocation
  • Meet unexpected expenses by using the partial, systematic, or milestone-based withdrawal feature
  • Wealth boosters and bonuses for better portfolio growth in the long-run
  • Protect your goal with premium protection option where the insurer pays remaining premiums, in case of your early demise
2. Pension4Life

Pension4Life plan is a safe long-term investment plan that gives you two options:

1. Immediate Annuity: The pension starts as soon as you invest a lump sum amount

2. Deferred Annuity: Invest gradually and start a regular stream of income a few years later

If you have recently retired and would like to invest a lumpsum amount to earn a regular income, the immediate annuity will meet your requirement. If you have a long way to go before you retire, a deferred annuity gives you time to invest over the years and build a corpus.

You will get income streams called “annuities” till the end of your life after which the purchased/invested amount would be given to your nominee. In case you have opted for a Joint Life Annuity, your spouse would continue receiving annuity even after you, until his/her demise. The purchased/invested amount would then be handed over to the nominee.

3. Guaranteed Income4Life

Another unique plan called the Guaranteed Income4Life allows you to invest for a specific period (say 10 years) and defer the pay outs by another 5 years. Your pay outs will start thereafter. The prominent unique features of this plan are:

  • You can hold the plan jointly with your spouse
  • The income can continue until the younger spouse reaches the age of 99
  • The income is guaranteed, so it will continue regardless of the market performance
4. Guaranteed Savings Plan

Guaranteed Savings Plan offers a guaranteed Sum Assured along with guaranteed yearly/loyalty additions. If you opt for a 20-year policy term with a 10-year premium paying term and invest Rs.1lakh each year for 10 years, the policy can give you a lump sum return of approximately Rs. 23lakhs at the end of 20 years. In case of untimely demise, the family gets higher of the following as a lumpsum amount.

a. 11 times the annual premium

b. 105% of premiums paid until the death

b. 105% of premiums paid until the death

Retirement planning is not about just keeping aside some money for old age. It should be a well thought out process taking into account possible expenses, risks, and suitable investment options that will give you enough money to live comfortably and peacefully. After you retire, only concern for your invested money is to keep up with the inflation. Meaning, wealth preservation is more important a goal for you than wealth generation. Thus, you can choose investments which can keep growing your retirement money steadily.

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Frequently Asked Questions (FAQs) for Retirement and Pension Plans

The premium is one of the most important factors to consider before buying a policy. Many people buy a life insurance policy with a high sum assured but are unable to process the premiums for the entire premium payment tenure. You can get a better idea of the premium outgo with the Premium calculator available in the ‘Tools and Calculator’ section of www.canarahsbclife.com.

The Invest 4G plan offers three benefit options to choose from. If you have opted for the Life Option or Whole Life Option, the insurer will pay the nominee(s) death benefit if the policyholder meets with an unfortunate incident. However, in the Life Option with Premium Funding, the policy continues even after the death of the policyholder. The company pays the remaining premiums until the policy matures.

Life is unpredictable and so it is important to prepare for all eventualities. If you regularly save a substantial amount of your income for retirement, the corpus may expand to a comfortable level before retirement. In case you become disabled and are unable to contribute to the retirement plans, most plans will continue to multiply your savings. The amount already accumulated will continue to grow and besides the existing plans you can also choose to invest in pension schemes specifically designed for people with disability.

Investment in ULIPs like Invest 4G plan qualifies for tax deductions under section 80C of the income tax law. The maturity benefits of ULIPs are also tax-exempt under section 10 (10D) of the Income Tax Act, 1961. However, if the premium paid during the policy term is more than 10% of the sum assured, the maturity proceeds will be taxable.

The concept of early retirement is catching up fast in India, but there are no specified ages for early retirement. While in some western countries the age between 35 and 45 is considered favourable for early retirement, in India the ideal age is 45-50 years. With the right planning and investments, it is not very difficult to retire early.

At the age of 35-40, people generally have several responsibilities such as children’s education and various EMIs. It is difficult to spare a substantial amount of income for retirement. Depending upon the needs of the household and the lifestyle, one should aim to save around 40-50% of his/her income. Around 10% of the income should exclusively be allocated for retirement planning. Here are some tips to choose the best retirement plan.

  • Focus on your needs: It is easier to formulate a strategy when the goal is clear. Make an estimate of the amount required to sustain your life. Take inflation into account and zero in on the targeted corpus.
  • Research thoroughly: Conduct thorough research before investing in any financial product. Read the term and conditions properly and try to understand how an investment product fits your needs.
  • Consider different products: The market is awash with all kinds of investment products. Do not follow conventional advice as the need of every person is different. Take into consideration all the suitable products, conduct an objective analysis and then invest.

Owning a house is a cherished dream for many. There are several ways to save for a new house, but in urgent cases, people may be tempted to withdraw from their retirement fund. There are various financial products for retirement planning, and all have different withdrawal rules. In the case of the National Pension Scheme, partial withdrawals for special purposes like buying a house are allowed only thrice during the policy tenure. However, to avail the withdrawal facility, you should be an NPS investor for at least 10 years and you are permitted to withdraw only 25% of your contribution. If you have a PPF account, you can withdraw 50% of the accumulated amount, but only after staying invested for at least 6 years. The Invest 4G plan also allows partial withdrawals after five years of investment.

The quantum of monthly savings depends on the specific needs of the buyer. Financial advisors, however, suggest people save around 15% of the monthly income for retirement.

Retirement plans such as NPS have a very low entry threshold. It is also open to all and anyone can open an NPS account and start saving. A small business can also invest in Invest 4G plan from Canara HSBC Oriental Bank of Commerce for as low as Rs 5000 every month.

The choice between paying off a student loan or start a retirement account is not a difficult one. Starting early for retirement planning has its own advantages but extending the student loan will increase the interest burden. You will have to find a balance between the two. Try to pay off the student loan as soon as possible, but do not hold back on investing in a retirement account.

Most people nominate their spouse to receive retirement benefits in their absence. But a spouse is not automatically entitled to be the beneficiary of a retirement account owned by the other spouse.

Gold is a safe investment asset and investors often flock to the yellow metal to stabilise their portfolios. Holding a small quantity of gold can be considered as the intrinsic value of gold remains intact. You can also choose to have an exposure to gold through ULIPs. ULIP funds invest in a variety of asset classes and some fund options also have a small exposure to gold. You can choose fund options with gold to have a small and indirect investment in gold.

While there are no explicit rules barring the use of retirement account to finance real estate, it may not be advisable to do so. For instance, you are allowed to avail loan from the PPF account from the third financial year. The loan can be used to finance real estate, but it would defeat the purpose of having a dedicated retirement account.

While there are no explicit rules barring the use of retirement account to finance real estate, it may not be advisable to do so. For instance, you are allowed to avail loan from the PPF account from the third financial year. The loan can be used to finance real estate, but it would defeat the purpose of having a dedicated retirement account.

The government has allowed all central government pensioners to open a joint account with their spouses.

Vesting date or age signifies when your pension plan’s accumulation phase is over and the distribution phase can begin. For example, in a deferred annuity plan, you may have a vesting date which is 10 to 30 years away depending on your age at entry. You will continue to invest or stay invested till the vesting date. After the vesting date or age, you can start receiving the pension or withdraw the money from the plan.

The steps may differ from plan to plan. However, you can buy the online retirement plans following the steps below:

  • Retirement Calculator: Use a retirement calculator to estimate your corpus need and expected monthly investment amount to achieve it
  • Choose Plan: Select the online retirement plan you want to start investing in
  • Contact Information: Fill in the personal details including the contact information. Make sure to put the correct e-mail ID which you can access since all future communication about the policy will take place via e-mail.
  • Define Your Investment: Select the goal, investment term, investment frequency and amount you want to invest (based on the calculator estimate)
  • Select Fund Allocation: Online retirement plans give you the option to invest in multiple assets including equity funds. You can select the ratio in which your premium will be allocated to these funds as per your risk appetite. Then select one of the portfolio rebalancing strategies.
  • Select Withdrawal Plan: You can withdraw money based on set milestone or systematically from the plan after the lock-in period. Select the options for withdrawal as per your plan.
  • Review Plan & Investment Details & Complete the Application Form

You can pay the premium amount before or after completing the application form to start investing.

The best time to plan your retirement is when you are planning your career. However, this may not be the time when you really start investing money for your retirement. You must start investing in your retirement plan as soon as you start earning.

Retirement is the only financial goal you cannot repair with other means of funding like a loan. Thus, developing the habit of investing with every income you have is the best way to have a comfortable retired life.

Insurance allows your family, especially your dependent spouse to continue living without financial worries if anything happens to you. Also, insurance may help you save enough for retirement in case of permanent disabilities. Additionally, life insurance retirement plans allow you to build a good retirement corpus with bonus additions.

Yes, you can change the nominee of the policy anytime you need. If you are using an Electronic Insurance Account (EIA) to manage your policies, you can change the nominees anytime from this account. Otherwise, you can contact the customer care to update the nominations on your policy.

You can opt for auto-debit of the premiums from your savings account. You can also pay the premiums online using your debit card, credit card or a payment wallet.

You can get Rs. 1 Core pension plan using the online retirement calculator. The calculator will assess your eligibility and provide you with the probable monthly or annual investment to achieve the goal. If the amount seems feasible you can complete the purchase online or set an appointment for a qualified advisor to help you in the process.

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