What is the sole purpose of working day and night? Besides feeding our creativity, the prime reason is to give a better life to our families and secure their financial future. For this purpose, we invest in various investment options like child education plans, save for their wedding and often create a good financial cushion for them to fall back on in emergencies. But what about one’s own financial security? When we are retired or not in a position to work anymore, would being dependent on our children be a wise option? Not really. Therefore, it is important to invest in pension schemes and secure one’s own financial future as well in the post-retirement period.
So what is the best time to invest in pension schemes and how to do it? Given below is a brief discussion regarding the same that can help investors understand the finer points of retirement planning and the available options for the same.
What are pension schemes and why do we need them?
Pension schemes are essentially retirement plans that one can invest in to secure their financial future in the post-retirement period. These plans require the investors to allocate a portion of their income in these plans periodically and at the end of investment tenure or upon maturity, they have the option to get the entire corpus or regular income at periodic intervals. The key to a good pension plan is its ability to generate decent and stable returns for investors in their retirement period. These returns have to be good enough to meet the daily expenses of the retirees as well as any unforeseen expenses.
Earlier pension scheme options would usually be restricted to PF or PPF or Bank FDs, but today investors have multiple options which are dynamic enough to provide returns that are substantial even after considering inflation and taxation. This will help one be independent and not be restricted by the personal obligations of their children or their relatives.
Also Read: Best investment plans for your retirement
What is the best time to invest in pension plans or retirement plans?
When it comes to retirement planning there is no definite starting point or ideal time to start planning one. The phrase earlier the better is what works while investing in pension schemes. Investors, however, are advised to alter their proportion of investment based on the stage of life they are in. This is explained in detail hereunder.
- When you start earning
At the onset of one’s career, i.e., when a person starts earning, is the time when they usually have lower responsibilities. This allows the investors to allocate more of their earnings towards savings and investments. It is also the most opportune time to invest in aggressive investment options that provide higher returns in the long term. The risk is, although higher, having the advantages of a long-term investment horizon will effectively reduce the overall risk of investment.
- When a person is in their 30
When a person is in their 30s, this is the time of increasing responsibilities. People usually start their families during this period and therefore, have the burden of added expenses. This reduces the amount of disposable income that they have and therefore, the amount that can be put in savings reduces. However, this does not mean that investors should stop saving. Even at this stage, a minimum of 20% to 30% of the earnings should go to savings and investments. The investment options at this stage can be ELSS funds, PPF, or Government Schemes like Senior Citizen Savings Scheme, NPS, etc.
- When a person is in their 40s
At this stage of life, the prime focus is usually on education or higher education for the children. While planning for their education and bright future, if we forget to plan for our retirement, it will cost us more to start now. Investors will have a lower tenure for their investments to mature till their retirement, therefore, to get the desired corpus in the limited time frame the investments will need to be increased. This may be difficult for most people as routine financial obligations may leave limited room for investments.
- When a person is closer to retirement
This is the final chance for a person to plan for their retirement. Ideally speaking, that ship has sailed but as it is said, something is better than nothing. When a person is closer to retirement, say in their 50s, the cost of medical attention would have increased. Also, the amount of investments or the corpus needed to have a comfortable life in their retirement would be quite high. This means that the investor will require to invest at least 50% of their earnings towards investments for them to be substantial enough that they can meet their retirement goals. Such a high amount of disposable income may not be feasible for most individuals. Therefore, the very purpose of saving for retirement at this stage is defeated.
Investors can opt for dynamic investment options like investment in equity funds to earn higher returns at this stage but that would be quite risky as any significant downtrend in the markets can wipe out their corpus. Safer investment options like NPS or PPF can be opted for by investors as there is no upper limit on the eligible age for investment in the latter and they can provide some amount of corpus till the time of retirement.
Retirement is an inevitable stage of life for every individual. However, we often ignore planning for the same, and when we do start planning for one at a later stage in life, it is quite frankly too late. The best time, therefore, to invest in pension schemes is at the earliest, right from the time we start our careers. At this stage, investing in pension schemes not only gives the maximum time for the investments to mature and build a significant corpus but also, the available options for investments are many to choose from. Hence, while we are carefree and enjoy the most from our life at the start of our career it is also smart to make sure we invest in pension schemes so we can enjoy our retirement too.
The available options for investment in pension schemes include NPS, PPF, Senior Citizen Savings Scheme, pension or retirement funds, insurance, mutual funds, etc.
Investment in pension schemes can provide a tax deduction to the investors depending on the type of investment. For example, investment in PPF can provide a deduction of up to Rs. 1,50,000 under section 80C of the Income Tax Act, investment in NPS can provide a deduction of up to Rs.1,50,000 under 80C and an additional deduction of Rs. 50,000 under section 80CCD(1B).
There is little point in investing in pension schemes when a person is in their 60s, however, there are a few available options like PF, NPS, debt funds, or hybrid funds that can provide decent returns to the investors.
The purpose of investing in pension schemes is to have a substantial corpus at the time of maturity which can be claimed in full or in periodic intervals to meet the expenses and lifestyle of the retirees. Having an insurance plan (life insurance or health insurance ) is quite crucial for any person but investing only in such plans does not equate to investing in a pension scheme.