Retirement Planning in India- How to Retire Comfortably by 60?

Summary

• This blog explains various strategies to generate adequate income for a seamless after-retirement life.
• It includes tax planning, investment strategies, and healthcare planning, as well as a guide on calculating the target retirement corpus.  

Why is the retirement plan important in India?

India’s economy is dynamic and constantly evolving. This raises concerns about the financial stability of Indian citizens. There are various reasons that make retirement plans the most important investments in India. They are: 

• Most government pension provisions are not available to the general public.
• Rapid advancements in medical science and healthcare have helped increase the average lifespan of individuals in India. 
• A rise in inflation erodes the purchasing power of Indian consumers, making goods and services more expensive over time. 
• Medical expenses tend to increase with age and can significantly reduce a person’s lifetime savings if not planned for in advance. 
• As families increasingly shift from joint to nuclear households, many children move away from their parents for work, education, or better career opportunities. 

The following reasons suggest planning for retirement from an early age.  

Taxation Planning

Tax planning is an essential part of retirement planning. The Income Tax Act of India offers several provisions that provide tax benefits on eligible investments, helping individuals build their retirement corpus while reducing their overall tax liability. 

• Section 80C: This provision allows a deduction on contributions made to PPFs, EPFs, Life Insurance Premiums, housing property, etc, up to ₹1,50,000.
• Section 80CCD(1B): This provision allows a deduction, especially on the National Pension System (NPS), if the contribution is made within ₹50,000.
• Section 80D: This provision allows taxpayers to claim deductions on eligible health insurance premiums, preventive health check-ups, and certain medical treatment expenses, subject to the applicable conditions and limits under the Income Tax Act. 

How to calculate your target retirement corpus

Estimating your retirement corpus is the first and most important step in creating a successful retirement plan. You should be aware of your expectations before making any decision. The following guide explains how to calculate your retirement target.

Step 1: Estimate your expenses after retirement: 

Estimate the amount of expenses after retirement, including everyday expenses such as food and utilities, maintenance, healthcare, travel, etc. And excluding the expenses that will no longer be valid, such as child education and work-related expenses.

Step 2: Adjust for Inflation:

The cost of living will continue to increase to a greater extent by the time you reach your retirement. In India, it is estimated to reach 6%-7% of the inflation rate.

Step 3: Estimate your timeline: 

Estimate the time of your retirement by the age at which you would like to retire, and activate your retirement corpus.

Step 4: Apply Safe Withdrawal Rate (SWR)

This is the amount of annual withdrawal you can make without exhausting your retirement savings. People usually assume 4% SWR rate in India.  

Step 5: Calculate the final target corpus

Calculate the total amount you want to save by the time you retire. Many individuals follow the 25x to 30x rule, which says that you should aim to save 25 times more than your current annual expenses.  

Here’s an example to demonstrate how it works. 

Mayank, a 25-year-old, earns an annual income of ₹20,000. He wanted to save for his retirement from a young age. He believed that beginning his retirement investments at 25 would allow him to accumulate sufficient wealth to maintain a comfortable lifestyle after retiring at 60. 

Therefore, he decided to calculate the amount he would save for the future. He calculated his current monthly expense, i.e., ₹15,000, and adjusted the estimated inflation rate at 6%. He also assumed the SWR rate at 4%, and decided to save enough that is equivalent to 25 times his current annual expense. Then he used the Edelweiss Mutual Funds Calculator to calculate the retirement corpus he needs to save for the future. The estimated retirement corpus that he needs to aim for is approximately ₹1.3 crores.

Power of Compounding

The power of compounding enables your investments to grow by generating returns on both the initial amount invested and the earnings accumulated over time, helping your wealth increase at an accelerating pace. In simple terms, when you earn returns on an investment and reinvest those earnings instead of withdrawing them, the accumulated returns also begin to generate their own returns. The longer your investments remain invested, the greater the impact of compounding, allowing your wealth to grow more rapidly over time.  

Core Investment Instruments

There are multiple options for you to choose from for your retirement plan. Some of them are introduced by the government, offering a good opportunity to invest and claim tax benefits. Some of them are mentioned below.

• National Pension System

The National Pension System (NPS) is a government-sponsored pension programme that enables Indian citizens to accumulate a retirement corpus and receive pension benefits. It follows a diversified investment approach allocating funds across equity shares, corporate debt, and government securities. This balanced approach helps manage risk while aiming for long-term wealth creation. This is one of the most efficient retirement instruments, suitable for a long-term retirement plan. Your NPS account provides online access to regular updates at any time, facilitating transparency.

• Employee Provident Fund

The EPF is a fund that helps to build the financial security of Indian employees. If you are a salaried employee in an Indian company, you are already contributing a small fraction of your salary to this fund. These funds also qualify for tax benefits, making them a tax-free investment, maintained by your employer.

• Public Provident Fund

The PPF is another government-backed fund that provides long-term savings. These funds provide tax-saving benefits, subject to the applicable provisions of the Income Tax Act. These funds are reliable for long-term investments, with a lock-in period of 15 years, and they are well-suited for long-term financial goals such as retirement planning in india.

• Mutual Funds and SIPs

Systematic Investment Plans (SIPs) have gained significant popularity among investors seeking disciplined and long-term wealth accumulation. This approach enables even small investors to invest regularly across a variety of financial instruments, making it ideal for long-term wealth creation. Mutual funds can be a useful tool to spread your investments and allow them to grow gradually. 

Healthcare: A Part of Retirement Planning

Planning for healthcare expenses is essential, as medical costs are among the most common and unavoidable retirement expenses. With age, medical expenses increase, too. Usually, while preparing a retirement plan, individuals forget to account for this expense and end up using their plan to pay their medical expenses. Therefore, here are some instruments that can be considered to mitigate this sudden occurrence of emergencies without disturbing the long-term retirement plan.

• Medical Emergency Fund

Setting aside a portion of your income to build an emergency fund can help you handle unexpected expenses. These funds will provide support during unavoidable medical emergencies. It is advisable to keep your emergency fund separate from your regular savings account and retirement or investment plans. These funds will help you cover several expenses that most insurance claims fail to cover.  

• Government Healthcare Schemes

There are several healthcare schemes introduced by the government of India for Indian citizens to ease their financial requirements during any illness.

The schemes are 

• Ayushman Bharat- Pradhan Mantri Jan Arogya Yojna (ABPMJAY) facilitates coverage up to ₹5 Lakhs per year.
• The Central Government Health Scheme (CGHS) provides healthcare benefits specifically to central government employees and eligible pensioners. 
• State Government Schemes are provided by many states to provide monetary assistance to senior citizens.

• Health Insurance

This is the most important and mandatory instrument that you should invest in. Health insurance provides financial coverage during any illness. To keep the insurance policy active, you must pay the applicable premium regularly. This will help you save your retirement plans from being exhausted while meeting huge medical bills.

Retirement roadmap with Age

The retirement plan is not a one-time investment. It is a gradual practice that requires discipline and consistency. 

• Start investing in SIPS in your 20s

Your 20s should be your starting point. This is the time when you start earning, when you begin handling expenses, and when you make financial decisions. Make use of this time by investing in financial instruments, letting them earn interest. It is not necessary to start with a huge amount of money. You can start small by investing in SIPs with smaller amounts. The main objective is to maintain consistency.

• Diversify your investment in your 30s

Once you reach your 30s, try to explore the market. Gather information on different financial instruments, understand their benefits, and assess the risks associated. Once you are ready after evaluation, diversify your portfolio with different financial instruments. This will help earn income from different sources to cover your growing expenses.

• Balance your growth and stability in your 40s

In your 40s, retirement is not very far. This is the time to build stability. Assess your asset allocation and make necessary changes to maintain stability and grow gradually. Monitor your retirement corpus annually. This is the stage to choose funds that will provide a stable income, such as debt instruments. 

• Increase safe investments in your 50s

As you approach your 60s, protecting your capital becomes equally important as growing your assets. During this phase, you should ensure that key documents such as your will and nominee information are properly in place. You should invest a larger portion in low-risk instruments. Also, by this age, you should decide on your withdrawal strategy for your retirement plan.

Common Retirement Planning Mistakes

There are several mistakes that people should avoid while preparing a retirement plan. Some of them are mentioned below.

Over-relying on Children for Financial Support

Many Indian parents unknowingly make this mistake, which can have significant financial consequences. Many Indian parents avoid making a reasonable retirement plan because they assume their children will step up as their financial support. Most of the time, this disappoints the parents because they forget the already existing financial pressure of their children.

Investing a huge amount in FDs

FDs are the most popular investment choices by Indian citizens, assuming that they will be adequate for the future. Often, they forget the impact of depleting purchasing power and increasing inflation in the economy. While Fixed Deposits offer assured returns, they may not generate enough growth to meet future financial needs.  

Ignoring inflation while fixing retirement goals

When people plan their retirement, they forget the impact of inflation. They assume that prices today will remain the same after a few decades. They often make retirement plans based on the inflation rate at the time of planning, instead of the adjusted inflation rate. This results in inadequate finances and causes a crisis after the finances are exhausted.  

Final Thought

Retirement planning is not a single investment; instead, it is a long-term, consistent investment process to increase wealth for the future. It is the savings that will help you to live a balanced life after retirement. Having a strong retirement plan by age 60 is not an easy task. However, it can be achieved by strategically planning and taking necessary actions accordingly. 

There are several options available to the general public to plan their retirement, alongside various tax benefits allowing them to generate more returns gradually. Therefore, starting a retirement plan at an early age is the most important and beneficial investment for an individual, allowing it to grow gradually over time.

FAQs

 1. How do I calculate my exact retirement corpus? 

Estimate your current monthly expenses, adjust them for inflation, decide your retirement age and expected lifespan, and calculate the amount you’ll need using a safe withdrawal rate of around 3.5%–4%. Online retirement calculators can also help provide a more personalised estimate. 

 2. Where should I invest to reach my target?

A diversified portfolio generally offers the best balance between growth and stability. Consider combining equity mutual funds through SIPs, the National Pension System (NPS), Employee Provident Fund (EPF), Public Provident Fund (PPF), and suitable debt investments based on your age and risk tolerance. 

 3. What happens to my money once I retire at 60? 

Your accumulated retirement corpus should continue to remain invested in an appropriate mix of assets. You can withdraw a fixed amount periodically while allowing the remaining investments to continue growing, helping your savings last throughout retirement. 

 4. How do I factor in healthcare and medical emergencies? 

Include a dedicated medical emergency fund in your retirement plan and purchase comprehensive health insurance before retirement. Also, account for rising medical inflation while estimating your retirement expenses. 

 5. What is the best strategy if I start late in life? 

If you begin retirement planning later than expected, focus on increasing your monthly investments, maximising contributions to retirement-oriented schemes, reducing unnecessary expenses, delaying retirement if feasible, and maintaining a disciplined investment approach. Although starting early provides the greatest advantage, consistent investing can still help you build a meaningful retirement corpus.