Retirement planning: Insurance as tool
If you are 23 and are lucky enough to think of retirement,that is Gods grace.
This is a question that seems to be on the minds of many people. With the provision in the Direct Taxes Code of getting a tax rebate of R3 lakh for a life insurance premium,this question becomes more relevant. First of all retirement planning is very easy if you start early. Make no mistake about that. If you are 23 and are lucky enough to think of retirement,that is Gods grace. This happens only if you are in a family where words like financial planning,equities,insurance,mutual funds are talked about at the lunch table.
Let us say you are 24 years of age and you are lucky enough to think,talk and even worry about retirement,then endowment insurance and pension plans are excellent products to consider.
Why? Simply because in the longer run the costs in any managed fund is the same. So a mutual fund or an endowment plan,all will look similar on a total costs basis.
Typically at a younger age you should consider a combination of the following products:
An unit linked endowment plan for 30 years or longer,if possible
An unit linked pension plan for the maximum possible period and,
A classic endowment insurance plan normally available for a maximum period of 30 years .
The unit linked endowment plan allows you to keep all the money in equities,and at the age of 24 it makes sense to be invested in equities. Time is hugely on your side and you can afford to be in equities for say 25 years,and that will be a serious wealth builder for you.
The unit linked pension plan allows you to go to 100 per cent in equities and let the power of compounding work for a long time. It allows you to stay on in equities for say 25 years,and then decide if it is necessary to shift to debt.
These funds will build good value over the next few years,and will form the fulcrum of your pension fund on which you can depend for the remaining portion of your non-earning,retired life.
The classic endowment policy will form the debt portion of the portfolio. The suggested premium ratio is 2:2:1. Thus,if you were to pay a premium of R3,00,000 a year,you should be putting R1,20,000 in an endowment plan,R1,20,000 in a unit linked pension plan and R60,000 in a classic endowment plan. This combination allows you to put 20 per cent in debt and keep the balance in equity.
You could take 10-12 endowment policies with various maturities,ensuring that one policy matures every year from your age of retirement to the next 10 years. You could even give it a one year gap. Thus the policy maturities could start from your age of say 60 to your age of 75 years. This will ensure that you have cash flows coming in from your retirement year of say 60 years till you are 75 years of age.
Such a stagger protects you well against a poor interest rate scenario in the year of your retirement. This cash flow could be used as a lump-sum for spending or for buying annuity plans for yourself and your wife.
How smart and innovative you get with your retirement planning will depend on your ability to understand the insurance and pension products. So the first step in getting yourself a nice retirement plan is to go and search for a good thinking retirement planning consultant. This should allow you to stop worrying about being able to retire rich by investing small amounts of money from a young age.
Author is ED,Marketing,SBI Life Insurance
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