Retirement Planning

retirement planning

Retirement Planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program and managing assets.

 

Advantages & Disadvantages of Pension Plans

  1. As it is already discussed that younger generation believes in hard work, saving more and early retirement. They need assurance of regular monthly income during the retired life. The pension plans with deferred annuity ensure that regular income right away. You can set our frequency of payouts such as monthly, quarterly, yearly etc. as per your requirement.
  2. Another advantage of the deferred annuity is that you don’t have to think of the investment at the time of your retirement. The interest rates are slowly decreasing in India. Hence, after 20-30 years when you will retire, it is probable that interest rate may go down and you have to invest more amount of money to get the same amount of pension. By investing the right away in a pension plan you are assuring a fixed amount of pension for a lifetime.
  3. The biggest disadvantage of pension plans which I feel is locking of your money. You are saving the money and you have to spend it for your retirement. You cannot withdraw or change to better investment option in between. In the case of NPS, you can withdraw a maximum of 60% of the corpus at the age of retirement and 40% is the must investment for buying the annuity. Moreover, the some of the maturity amounts is taxable which actually made it less attractive for investment.
  4. The interest rate of any pension plan is very low i.e. 6%-7%. This low-interest rate cannot even beat the inflation rate. If you invest in a small savings scheme like PPF, it will give you a better return. If you have more than ten years in your hand, you can save through SIP of equity mutual fund which gives you far better return with respect to pension plans.
  5. Annuities are less attractive because it gives you simple interest. Money is not compounded in these pension plans. Remember, all the small savings schemes like PPF, EPF etc. gives you the facility of compounding the money.

planning retirement

  • Personal Planning

All too often people entering retirement do not place enough emphasis on personal planning to ensure they maximize their opportunities. So take the time now — at an early stage in your planning process — to think about the choices you have about how you would like to spend your time during retirement.

  • Financial Planning

Your retirement will be more enjoyable if your income is structured to fit your lifestyle choices and if you have developed a retirement plan to protect the assets you have worked hard to acquire.

Follow these foolproof steps to retirement income planning:

  1. Identify & compare your income and expenses to determine any shortfalls or surpluses.
  2. Review & analyze the various retirement income strategies.
  3. Review & compare the retirement income options available.
  4. Develop an action plan.

Instruments for Retirement Plan

Retirement planning includes a lot more than simply how much you will save and how much you need. It takes into account your complete financial picture.

  • Provident fund
    This is the bulwark of the retirement savings of salaried people in the organised sector. Mandatory contributions fatten the corpus while tax-free status adds to the attraction. Works best if you don’t withdraw when you change jobs or dip into the corpus before retirement.
  • Public Provident Fund (PPF)Those not covered by the Provident Fund should opt for the PPF. Otherwise, the Voluntary Provident Fund is a better alternative to this tax-free option.
  • Insurance                                                                                                                                                                                                                           A key component to retirement planning is protecting your assets. Age comes with increased medical expenses, and you will have to navigate the often-complicated medicare system.
  • Fixed deposits
    Taxable but assured returns. Income up to Rs 50,000 is tax free. Unlike SCSS and PMVVY, there is no cap on investment.
  • Debt-oriented mutual funds

    Give returns roughly equal to fixed deposits but are more tax efficient. Use of systematic withdrawal plans reduces effective tax rate to 3-4% even for those in 30% tax bracket.

Stages for Retirement

  • Pre-Retirement

This phase occurs during the final years of the accumulation phase and should begin when you reach 50 years old or are 15 years away from retiring, whichever happens first. Now is the time to get your plan in place, making sure your finances are lined up correctly for retirement day so nothing will be left to chance. If you work for a company with a benefits specialist, arrange an appointment to become informed about the various ways you can convert your employer retirement savings into a stream of income or an IRA. Consider using a tool known as “scenario planning.”

  • Early-Retirement
  • Mid-Retirement

This phase begins at age 70 and lasts as long as you are able-bodied and high-functioning. Despite your good health, begin looking at what steps you would like your family to take should your condition decline significantly. In most cases your ability to make all your own decisions, care for yourself, engage with the world on your terms, and manage your affairs does not vanish in a split second.

  • Later Retirement
As you age, your investment accounts should become more conservative. While time is running out to save for people at this stage of retirement planning, there are a few advantages. Higher wages and potentially having some of the aforementioned expenses (mortgages, student loans, credit card debt, etc.) paid off by this time can leave you with more disposable income to invest.And it’s never too late to set up and contribute to a 401(k) or an IRA.

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