Imagine this scenario: You are 67 years old, healthy and hearty, sitting on the porch of your two-storeyed home listening to the sounds of your grandchildren playing. In the evening, you have a dinner at your favourite restaurant planned with your close friends. And in the next two days, you are going to be boarding a flight to Paris, for a Europe trip planned to last for a month. And what’s the important thing about all these scenarios? You’re funding all of it yourself, independently.
Such scenarios can be achieved, with beginning your retirement planning, may be, in your twenties itself. However, people may usually postpone their retirement planning to the later stages of their life. As per India Retirement Index Study’ (IRIS), 2022, a shocking 86% of people over the age of 50 had regrets about not planning their retirement earlier1.
Why should you not procrastinate planning for your retirement?
As with other decisions related to money and financial independence, it is preferred if retirement planning is approached as soon as possible, too.
Otherwise, you may experience the following disadvantages:
• Plans could become expensive to maintain
Age is one of the factors that influences premium for your life cover part of the life insurance plan, hence your premium for your life cover part of the life insurance plan may typically be lower when you are 30 years as compared to when you are 45 years old. Furthermore, buying a life insurance plan at a young age allows you and your loved ones to enjoy financial security for a longer period.
• Returns may be diminished due to a smaller timeframe
Along with higher maintenance costs, another monetary drawback of late retirement planning might be the relatively diminished returns. These kinds of investments perform optimally if they are held for the long term, since this allows compound interest to do its work effectively.
Let’s consider two investors, Anuj and Rashmikant, as an example.
Anuj understood the importance of retirement planning and started investing in a ULIP when he was 30 years old with the intention of wealth generation for retirement.
Using the help of a retirement plan calculator to better understand his goals, he decided to invest Rs 60,000 every year until he was 60 years old.
On the other hand, Rashmikant awakened to the benefits of retirement planning very late. He began his retirement plan at the age of 45 years by investing Rs 1,80,000 every year for the next 15 years.
By the time both were 60 years old, assuming a steady return of 8% for both, Anuj has accumulated approximately Rs 55 lakhs while Rashmikant has been able to accumulate approximately Rs 45 lakhs only.
*Note: The above figures are for illustration purposes only and not indicative of actual returns. Please refer to the online calculator and policy brochure for more details on ULIP product and fund performance.
• Chances of investing in an aggressive portfolio may reduce
Another way your returns may reduce due to a late start in retirement planning is because, at a later stage in life, you may not want to invest aggressively, if you have a lower risk appetite. You may want to stick to a more conservative portfolio, which includes fixed-income securities, low-risk instruments, etc.
The benefit of investing in a ULIP with a conservative approach is that you bear lesser risks, which is suitable when you are nearing the end of your work life. However, the market linked returns may be lesser with such an approach, as compared to investments in high-risk equity instruments.
• You may lose out on related tax benefits
Every year you pay the premium for your ULIP or retirement-oriented life insurance policy, you have the opportunity to save up tax on Rs 1.5 lakhs of premium paid by claiming deduction under Section 80C or Section 80CCC of the Income Tax Act, 1961. Premiums paid towards a specific retirement plan, such as a pension plan or an annuity policy, are also eligible for deductions under Section 80CCC. Note that this deduction is clubbed with the rest of the Section 80C deductions and the maximum limit for the total claimable deduction under Section 80C is Rs 1.5 lakhs.
Further on maturity of annuity policy, any commuted value of pension is tax free in the hands of policyholder under Section 10(10A) of Income Tax Act,1961.
Also, note that some deductions may not be applicable if you are opting for the new tax regime. Only those who are paying tax via the old tax regime may be able to enjoy the deductions, as long as the terms and conditions prescribed in Income Tax Act,1961 are met.
Before proceeding with any plan, ensure to consult a financial advisor and/or a tax expert. Using tools such as the retirement plan calculator and the ULIP calculator can also help you in the process of starting your retirement planning early.