The basic principle of financial planning is to have a goal oriented approach and align investments accordingly. During the process of financial planning, there are few who manage to build a kitty for their basic needs, but most hesitate when it comes to planning for their last financial and life milestone, which is ‘Retirement’.
This is very important because growing old can be expensive, add to that the burden of inflation, and not having enough money to sustain future expenses can cause stress and worry. Retirement planning means preparing for a regular stream of income after retirement and to ensure financial stability in your later years without depending on others.
Many millennials think that retirement is a distant thing to worry about and can be planned for some time in the far future. Yet, if you want to lead a dignified retired life, retirement planning is necessary. No matter what your ideal retirement looks like, be it a relaxed time at home, family and loved ones or travel, it will need money. While awareness about savings has been slowly increasing, it needs to be channelized to meet financial goals, especially retirement.
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We live with three major risks which not only affect individuals but the family, the first being the risk of early death. In this case, if the individual has secured his life through insurance, this shall take care of the basic needs for his family.
The second risk shall be the risk of frequent illness, which indicates that there shall be recurring costs and accordingly families shall be burdened with provision for medical treatment, which can be addressed through health protection.
The third and most important risk is longevity. In this case, as one lives longer, their retirement income must stretch out over a longer time. In a joint family with a multi-generational co-resident, the offspring & family members take responsibility for the elders of the house. However, with changing demography, migration, and increased longevity of the elderly, this traditional source of old age security is also dwindling.
To give you a few statistics, the average life of a person has increased from 42 years in 1960 to more than 70 years today. With medical advancement, the longevity has been increasing continuously. Younger generation, currently in the age bracket of 25 years, may live beyond 90 years of age.
For those who are in their 40's now, 80 years would be normal – this means living for a minimum 20 years post retirement. While this may be good news, planning for retirement is also essential as one may require adequate corpus that may last 20 years or more.
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Now, let us explore how NPS as a financial product can help overcome this challenge of accumulating enough corpus for your sunset years.
Any financial product for retirement planning should meet the long-term goals and also provide a security net in terms of returns for the individual investor. Further, it should also meet the expectation with regards to beating inflation and compounding over a period of time.
With NPS, one can commence the investment journey as early as 21 years and can stay invested till the age of 70 years. Owing to the long years put into investment, it helps generate enough pension corpus on account of compounding and good returns.
Being a low-cost retirement solution, NPS offers a range of investment options and choice of pension fund schemes making retirement planning easy. The blended cost in NPS is around 6 paise as compared to similar other financial products.
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NPS has fast been gaining popularity over a period of time as a preferred retirement-focused investment scheme, given the simplicity of the product as well as the fact that it is flexible. Since its inception in 2004, the product has undergone vast enhancement in terms of product features and flexibility in order to make it more versatile, and at the same time user-friendly.
The option of investing through the Systematic Investing mode also makes it easy for the individual to have a disciplined investment. Moreover, NPS provides an option to stay invested till the ripe age of 75 years. This along with the added benefit of tax advantage is definitely the best combination.
Note: Returns on NPS is in the range of 9% - 12% (Source: https://npstrust.org.in)
Amit Sinha, Group Head, Social Security and Welfare, Protean eGov Technologies Limited (formerly NSDL eGovernance Infrastructure Limited)
