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What is a Retirement Plan - What are its Features?

A retirement plan is an important tool for anyone looking to secure their financial future and enjoy a comfortable retirement. Read the blog to learn more about the relevance of retirement plans and the right time to invest in them.

  • Aug 27, 2021

Retirement pension plans can be established by individuals, employers, or the government and typically involve contributions made over an extended period of time.

Key takeaways

  • A retirement plan is a type of life insurance plan designed to fulfil the post-retirement needs of an individual.
  • As per section 80CCC of the Income Tax Act, 1961, a deduction of ₹1.5 lakhs is applicable on investment in pension plans.
  • The earlier you start planning, the better the chances of achieving your retirement goals.
  • Retirement planning is not just about ensuring your financial security; it is also about creating a legacy for your loved ones.

Your retirement should be the best part of your life. After all, you work hard to achieve your dreams and fulfill your responsibilities. You save today so that you have a surplus for tomorrow. Therefore, you would like to have peace of mind after you retire, right? You may want to relax, inculcate a hobby or look back on your journey till now.

All this is possible with some planning and smart choices you make. Keep reading to know about retirement plans and how they can help you achieve this last mile.

What is a Retirement Plan?

A retirement plan is a type of life insurance plan designed to fulfil the post-retirement needs of an individual. It helps create a corpus amount and generate a regular income after retirement in the form of a pension. Hence, it is also known as a pension plan.

A good pension plan:

  • Outlives your lifespan and, thus, helps you maintain your living standards.
  • Keeps your investment safe
  • Helps to beat inflation
  • Features of a Retirement Plan

Regular and Guaranteed Income

It provides a regular and steady income after retiring or immediately after investing, depending upon the type and options chosen.

Income Tax Relief

As per section 80CCC of the income tax act, 1961, a deduction of ₹1.5 lakhs is applicable on investment in pension plans. It is important to note that this deduction cannot be claimed separately from section 80C. It simply means that the total tax relief claimed under section 80C and 80CCC cannot be more than ₹1.5 lakhs which include all 80C eligible retirement investment plan such as ELSS funds, tax-saving fixed deposits, PPF (Public Provident Fund), etc.

Lifetime Payment

Payment duration is the total duration for which you keep receiving the pension after retirement. For instance, if your plan offers to pay you a regular income from the age of 60 to the age of 75, then the payment duration is 15 years.

Death benefits

On any tragic and unforeseeable occurrence, such as the death of the insurer, the nominee receives an amount as death benefit from the insurance firm as compensation. It is common to add accident benefits, too, under this rider.

Diversification Option

Many retirement plans let you choose your funds’ asset allocation, providing you with the flexibility to diversify your funds based on your objectives and risk appetite.

Earn Bonus

Some of the plans also provide a bonus every year after a few years to ensure your fund grows over time.

Importance of Retirement Planning

Retirement is an inevitable phase of life, but unfortunately, most people fail to plan for it. Retirement planning is crucial if you want to enjoy your golden years and live a stress-free life. The earlier you start planning, the better the chances of achieving your retirement goals. Here are some reasons why retirement planning is essential.

Financial Security

One of the most significant reasons for retirement planning is financial security. Without a proper plan, you risk running out of money during retirement. Retirement planning ensures that you have enough money to support your lifestyle and pay for medical expenses. With the increasing cost of living, it is essential to start saving for retirement as early as possible.

Peace of Mind

Retirement planning provides peace of mind. Knowing that you have enough money to support your lifestyle during retirement allows you to enjoy your golden years without worrying about finances. You can focus on your hobbies, travel, spend time with family, and enjoy life without the stress of financial uncertainty.

Maintaining Your Lifestyle

Retirement planning allows you to maintain your lifestyle during retirement. It is essential to estimate how much money you need to maintain your current lifestyle during retirement. Retirement planning helps you to make informed decisions on your spending habits and investment strategies to achieve your retirement goals.

Healthcare Costs

Healthcare costs are rising every year, and without proper planning, they can quickly deplete your savings. Retirement planning includes estimating your medical expenses and making sure you have adequate health insurance coverage. With a solid retirement plan, you can protect yourself against the high cost of healthcare during retirement.

Legacy Planning

Retirement planning is not just about ensuring your financial security; it is also about creating a legacy for your loved ones. Estate planning makes ensuring that your assets are dispersed after your death in accordance with your intentions. This includes setting up a will, trust, and other legal documents that help protect your assets.

Reasons to Plan for Your Retirement

Retirement planning may not be the most exciting topic to think about, but it is a crucial aspect of financial well-being that everyone needs to consider. Retirement is an inevitable phase of life that will require a significant amount of financial preparation. Therefore, planning for your retirement is one of the most important things you can do to ensure a comfortable and enjoyable life after you stop working.

Secure Your Financial Future

Planning for retirement is essential for securing your financial future. Retirement planning ensures that you have enough money to cover your expenses when you are no longer working. Without proper planning, you could find yourself struggling to pay bills or living a lower standard of life than you are used to. By planning your retirement, you can set aside enough money to provide for your needs during your golden years.

Provide for Your Loved Ones

Retirement planning not only benefits you, but it can also provide for your loved ones. With the right planning, you can ensure that your spouse or dependents are taken care of if you are no longer around to provide for them. Proper estate planning can also ensure that your assets are distributed according to your wishes, reducing the burden on your loved ones after you are gone.

Take Control of Your Life

Planning for retirement puts you in control of your life. When you have a plan in place, you can make informed decisions about your future. You can choose how and when you retire, where you live, and what kind of lifestyle you want to have. Without a plan, you may feel like you are at the mercy of outside forces, such as the economy or your employer.

Avoid Financial Stress

Retirement planning can help you avoid financial stress. When you have a plan in place, you can feel more confident about your financial future. You will not have to worry about whether you will have enough money to pay for your expenses or if you will outlive your savings. Instead, you can focus on enjoying your retirement and pursuing your passions.

When Should You Start with Retirement Planning?

Retirement planning is an essential part of financial planning. It involves preparing for your golden years when you will no longer be working and need a source of income to maintain your lifestyle. Many people delay planning for their retirement, thinking they have plenty of time to do so. However, the truth is that the earlier you start planning for retirement, the better off you will be in the long run.

The simple answer to when you should start with retirement planning is as soon as possible. Whether you are in your 20s, 30s, or 40s, it is never too early to start planning for your retirement. The earlier you start, the more time you have to build up your retirement savings and investments, which will ultimately give you a more comfortable retirement.

The potential of compounding is one of the key justifications for beginning early retirement preparation. The ability of an investment to produce earnings that are then reinvested to produce even more earnings is known as compounding. Your money will compound and grow more quickly the longer it is invested. By getting started early, you can benefit from the power of compounding and create a sizeable retirement nest egg.

Another reason to start planning for retirement early is that you have more time to recover from financial setbacks. Life is unpredictable, and unexpected expenses can arise at any time. By starting early, you have more time to recover from any setbacks and continue building your retirement savings.

If you wait too long to start planning for retirement, you may find yourself in a difficult situation where you have to work longer than you anticipated or make significant lifestyle changes to make ends meet during retirement. By starting early, you can avoid these situations and have greater financial security in your retirement years.

It is important to note that retirement planning is not a one-time event. It is an ongoing process that requires regular review and adjustments as your financial situation and retirement goals change over time. By starting early, you give yourself more time to make adjustments and ensure that you are on track to meet your retirement goals.

Final Thoughts

Retirement plans offer many essential benefits to investors, helping them build a corpus for retirement while also enabling them to plan for their regular income post-retirement. Do note that not all plans are the same. Some plans may have different features. It is crucial to choose the right plan that comes with features suited to your needs.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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- A Consumer Education Initiative series by Kotak Life

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