How can I manage the risk in my retirement plan?

Retirement is regarded as the golden years of life. A new phase of life begins upon retirement, a carefree life with a goal of enjoyment and fulfillment of all those things you wished to do earlier but couldn't do due to your job. But to fulfill all the dreams and to enjoy a stable life after retirement, one needs to make sure that he/she has saved enough for the future. But how does one make sure that the income sources they depend on to live a life after retirement have a guarantee to make ends meet? Every individual planning for their retirement thinks once in their lifetime, “How can I manage the risk in my retirement plan?”

There are certain risks associated with retirement plans. Generally, these risks vary from individual to individual based on what course of action they choose for their retirement. But, certain risks are common to all. These are the general risks that almost every retiree is prone to. In this article, we will cover different types of risks associated with retirement that are common to all, and suggest ways to tackle them. Remember to read till the end to eliminate the risks in your retirement plan!

Types of risks in retirement plans and how to combat them

Inflation Risk

To understand the inflation risk and how it can affect retirement plans, let's try to understand the meaning of inflation first. Inflation can be described as the rate of increase in prices over a given period. The prices of many commodities ranging from food to medicines, luxury goods, etc have increased a lot over the years. This is due to inflation.

Since over a period the prices keep increasing, it starts reducing your purchasing power, leading to a reduction in the savings for your retirement. A slight percentage increase in prices can significantly drop the purchasing power of individuals.

Only a fool would ignore the risk of inflation in a retirement plan. To battle against the risk of inflation, and to lead a financially stable life after retirement, a comprehensive plan needs to be made. Firstly, you must make changes in expenditure and investment, considering the average inflation rate over the years. For instance, assuming that a 4-5% inflation takes place in India over some time, you can make necessary adjustments. Such planning of investment and expenditure can lead to long-term benefits after retirement.

Longevity risk

Longevity means the length of an individual's life. We can not predict how long we are going to live. But we know that life is uncertain. This makes it difficult to plan life after retirement. We want to enjoy thinking that we only live once and tomorrow is not promised. At the same time, we also fear that by living on this principle, we may run out of savings for the future. This is what is popularly known as longevity risk. The retirement period can be longer than you expect. So, to combat longevity risk, one must plan accordingly. Some of the ways to avoid longevity risk are-

• 1. Maximise income sources

The more the income sources, the more the retirement savings. Investing in different schemes like the National Pension System or NPS that allow you to save taxes can help us increase income. Certain investments are exempted from income tax by Section 80C of the Income Tax Act. A maximum deduction of up to 1.5 lakh is permissible every year.

Section 80C of the Income Tax Act covers the tax deduction of ₹1.5 lakh for self contribution to the National Pension Scheme. Under Section 80C, an exemption is provided for investment in life insurance. Section 10(10D) is available under both the Old Tax Regime and the New Tax Regime and mandates the exemption on investment in life insurance.

Under Section 80C of the Income Tax Act, investment in Public Provident Fund (PPF) is eligible for a tax exemption up to ₹1.5 lakh. Under Section 10 of the Income Tax Act, interest and maturity are relaxed from taxes.

Market Risk

Market risk is present in all financial aspects. You can subject yourself to the equity markets through mutual funds or government-backed savings schemes like the National Pension Scheme, ELSS, etc. Diversification can surely reduce the impacts of fluctuations, thereby reducing risks for retirement.

Health Risk

The health of an individual is unpredictable. In today's world, pollution and diseases are on the rise. Health risks are way too common. Investing in health insurance is the only logical way to avoid any health risks in retirement plans. The earlier you invest in health insurance, the more you save. As you start to age, health insurance starts costing a lot. Investment in medical insurance can help save up the costs of health atrocities in the future. Section 80D of the Income Tax Act provides for a deduction for medical insurance, provided he/ she opts for the Old Tax Regime. A benefit is included via this scheme, offering a preventive full body health check-up to ₹5000 inclusive, thereby helping individuals save taxes increase income and save more for retirement.

A comprehensive and well-thought-out retirement plan is necessary in today's economy. Through this blog, we have tried to make an extensive plan so that you can manage the risk in your retirement plans. Keep reading with PensionBox to know more about saving taxes and building a carefree future.