A lumpsum is not a paycheck: What Indians get wrong after retirement

Retirement planning in India often revolves around one question: how large a corpus can be accumulated before leaving the workforce? However, having a sizeable retirement corpus does not necessarily ensure a steady income after retirement, particularly as people live longer and inflation erodes the purchasing power of savings.

Why a retirement corpus may not be enough

“Many individuals assume that their retirement needs will be adequately covered through their retirement fund, investment corpus, gratuity benefits, proceeds from any sale of assets, or any other savings instruments. While these can certainly contribute towards retirement savings, relying solely on them may not always be enough,” said Ashok Manwani, Vice President – Products, Go Digit Life Insurance.

According to Manwani, retirement planning needs to focus not only on building wealth during the accumulation phase but also on converting that wealth into a sustainable income stream after retirement. This is particularly relevant in India, where retirees may spend considerable time building a corpus but comparatively less time planning how it will generate regular income.

How annuities can provide regular income

Annuities are among the financial products that can be used to address this income challenge. Offered by life insurers, annuities provide regular income in return for either a lump-sum investment or a series of premium payments. Depending on the product, payouts can begin immediately or after a specified deferment period.

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Broadly, annuities can be fixed or variable. A fixed annuity provides a predetermined income stream, offering greater predictability for retirees who prioritise certainty. A variable annuity can combine a guaranteed component with a portion linked to market performance.

What the illustration shows

For instance, in an illustration provided by Go Digit Life Insurance, a 45-year-old invests ₹2 lakh annually for 10 years and begins receiving annuity income at 61. Under a 100% guaranteed annuity option, the annual payout is illustrated at ₹2.55 lakh throughout the period shown.

Under a variable annuity with 60% of the payout guaranteed and the remaining 40% linked to the Nifty 50, the illustrated annual payout at age 61 is ₹3.55 lakh assuming a 12% annual Nifty 50 return. At assumed returns of 10% and 8%, the corresponding payout is ₹3.17 lakh and ₹2.86 lakh, respectively. These market-linked assumptions are illustrative and not indicative of future performance.

Annuity options: At a glance

Immediate vs deferred annuity

An immediate annuity involves a lump-sum payment followed by regular payouts, potentially beginning as early as the following month. A deferred annuity is purchased earlier, with income beginning at a future date chosen by the policyholder.

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For retirees, the objective is therefore not simply to preserve a corpus but to ensure that it can support expenses throughout retirement.

“The key question approaching retirement is not ‘How much have I saved?’ but ‘How will my savings pay me every month after I stop working?’” Manwani said.