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13 Most Frequently Asked Questions on Retirement Research Team | Posted On Wednesday, October 24,2018, 06:25 PM

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13 Most Frequently Asked Questions on Retirement



13 Most Frequently Asked Retirement Planning Questions

1. How much should you save for retirement?

You can never be sure of how much you should save for retirement. It is different for everybody. Just start saving each month specifically for retirement. Time to time, make sure you increase the quantum of savings.

Keep in mind your retirement goals, responsibilities and post-retirement income like rental income, pension etc. while ascertaining how much you want to save for retirement.

2. Should you start saving for retirement while in college?

This can’t be bad at all. Starting early instills financial discipline in you.

3. Should you save for retirement or children’s college education first?

Saving for retirement is as important as saving for children’s education. You surely want to give your children the best education you can afford. You definitely don’t want to be a burden on your children. Therefore, both should be given equal importance.

4. How to save for retirement and children's education at the same time?

It's not at all easy to save for retirement and children's education at the same time. Education expenses are ever increasing. Is your income also increasing accordingly? You may think so, but don’t forget that inflation eats up most of the hike in your salary.

Can you use inflation and increasing education expenses as an excuse not to plan for either one of retirement and children’s education? Can you postpone even one of the two?

Postponing retirement means losing out on years of compounding power and tax-deferred growth. Postponing saving for children’s education may mean the need to avail educational loan and years of repayments along with other loan repayments.

Therefore, it is important to contribute to both. This is how you can go about it:

  • Ascertain how much you wish to save up for children’s education and retirement. While working on the retirement plan, remember to include the existing estimated value of pension plans like EPF or those provided by the employer.
  • Get a deeper insight into your financial goals. Reflect if travelling often after retirement is important to you or educating your children is important. Is it possible for you to retire early and save up for children’s education?
  • Do you want your children to study at a prestigious college or any other college?

Depending on the conclusion of your study, assess if you can afford to save for both goals simultaneously. If not, you’ll have to make some compromises:

  • Cut unnecessary expenses, live modestly. Reduce your living standards now than in retirement.
  • Look to increase your income. Move to a better paying position. Get a second job.
  • Invest more aggressively keeping in mind the risks.
  • Encourage your child to contribute to their higher education costs. They might take up part-time jobs.
  • Encourage your children to consider scholarships.
  • Have separate investments for both the goals. Don’t mix. Don’t use retirement and children’s education funds for any other purpose.

5.  Should you invest in a pension plan if you are contributing to EPF?

Yes. IT is very important to invest in a separate pension plan. EPF should be kept intact till your working life unless you quit and start a business. In this case, you’ll have to be wary of the tax implications of EPF. Also, with inflation increasing at alarming rates, it is wise to save as much as you can. Invest in Mutual Funds, Equity Funds, PPF, etc. Remember, your retirement portfolio should be diversified.

It should have fixed income earning securities, debt and equity components. Consider PPF and FD to earn for fixed income. Consider debt funds to earn better returns than FDs at moderate risk. Consider ELSS to create wealth over a long-term.

6. What is the best retirement plan for the self-employed?

Unlike the salaried people, the self-employed don’t have a compulsion to contribute to a retirement plan like EPF. Keeping this in mind, PPF was introduced. Self-employed can make the best of this option. It gives guaranteed returns and keeps your funds safe as it is backed by the government.

However, it is not safe to rely on PPF alone. Consider investing in mutual funds. If you are a risk aggressive investor, you can go for equities or sector funds or thematic funds which help in wealth creation but are very risky.

Make sure you don’t mix investments and goals. Try to be as specific as possible. If you’re investing in PPF for your children’s education, try to invest for retirement in other option or draw a stark proportion between the monetary values of both the goals.

7. What happens to retirement funds if you die before withdrawing the money?

If such a case happens, the retirement funds will be passed on to the beneficial nominee. A beneficial nominee is the rightful receiver of the money under retirement plans, insurance policies, etc.

8. When is it too early to start retirement planning?

It is never too early to start retirement planning.

9. Should you pay off student loan first or start saving for retirement?

Most companies come under the purview of the EPF Act. Some employers provide their employees with ESI. Without even your knowledge a part of your salary is being invested in such retirement schemes. Hence, you can also concentrate on repaying the student loan. There’s money going into your fund every month and at the same time, your loan is being paid off.

If your employer doesn't offer such retirement schemes, it is wise to first repay your loan as soon as possible.

10. How aggressive should you be when investing for retirement?

It all depends upon individuals. There are a number of factors you can consider, like:

  • Your income
  • Your assets
  • Your risk appetite
  • Age at which you want to retire
  • Whether you have access to an employer-based pension plan
  • Your likely expenses during retirement

A traditional approach to retirement was to:

  • Invest aggressively when you're young
  • Eventually, move toward a conservative approach

By the time you retire, your portfolio will have more fixed income securities, bonds and FDs. The idea behind this approach is to assume lower risk as you near retirement in order to earn regular fixed income. You don’t want to gamble away your retirement money.

However, this doesn’t work always. Nowadays people invest aggressively over the long term (in equities, mutual funds). An increasing number of senior citizens are changing their approach and don’t wish to depend on their children for anything in retirement. Without anyone to take care of them, they realize that building a huge retirement corpus is very crucial.

Also, an increasing number of people now want to retire early. This means they’ll have more to do during retirement as they’ll retire young and live long. Even if you wish to retire at 50, you’ll have a good two decades of activity to fund. In such cases, it is inevitable to invest more aggressively.

Whatever approach you may have towards retirement, you have a well-balanced retirement portfolio throughout.

11. How to plan for retirement if your employer doesn't offer retirement benefits?

Don’t wait for your employer to offer you retirement benefits. Start right away:

  • Start off by opening a PPF account. Invest in this as much as allowable for tax purposes each year. This will give you assured returns after 15-years. PPF doesn’t earn high returns, but it is great to preserve your capital.
  • To create wealth, consider investing in equities.
  • If you’re a newbie, consider Equity SIPs.
  • You can also start investing in equity via ELSS, a tax-beneficial mutual fund.
  • Once you get hands on the stock market, you can start investing directly.
  • Simultaneously consider opening NPS. It works like the mutual funds and is backed by the government.
  • Also, purchasing an annuity will be wise. You keep investing for a specified term and start receiving a pension in the vesting period decided by you.
  • Finally, don't forget to make use of the government pension schemes. These earn high-interest rate than FD and make up for the assured income generating assets of a retirement portfolio.

12. How late is too late to start saving for retirement?

You should start saving for retirement in your 20s. This means you have more time to enhance the chances of living a retirement life that you desire.

As you get old, say in your 40s, you will not have saved much. You may face difficulties in building your ideal retirement fund. You’ll have less time for trial and error. You can’t take high risks. Without assuming risks you can’t expect attractive returns. You’ll have to make tough choices.

Tips to save enough for retirement if you start late:

1. Firstly, save as much as you can. It is a plain and simple logic: The more you save, the more you'll have for your retirement. Try to increase your contributions to the existing pension plans that you may have subscribed to, like EPF, PPF, etc.

2. Cut down your expenses. Not all your expenses are necessary. Ditch expensive lunches, dinners and coffees. Take public transport.

3. Start investing aggressively. Find out those stocks and mutual funds performing well. Remember, such investments are subject to market risk. These may also erode your principal or capital. Therefore, be careful. Take expert advice.

4. Delay your retirement. If you start late, you’ll have saved less and also to retire late. Are you ready to work even after age 65?

5. Evaluate your retirement goals. Set realistic and achievable retirement goals. This way you’ll be clear on what you want and act accordingly.

13. What does Retirement planning terminologies mean?

1. Annuity: It is a fixed sum of money paid out at regular intervals like monthly or yearly, for a specified period of time, often for the rest of your life.

2. Compound interest: It is calculated on both, the principal and interest that is earned.

3. Defined benefit pension plan: It is a retirement plan provided by an employer. It is calculated based on the tenure and salary.

4. Defined contribution plan: A retirement plan in which the employer and/or employees contribute a percentage of their salary.

5. Asset allocation: Determining the proportion of investing money among different asset classes, like stocks, bonds and so on. Asset allocation has a significant impact on a long-term investment portfolio.

6. Deduction: These are the expenses and investments allowed under the Income Tax Act, 1961, which can be reduced from gross income to determine taxable income.

7. Diversification: It’s a strategy of spreading out investments in several industries, market sectors or to reduce the risk of investing in a single sector.

8. Rupee cost averaging: A method of investing a fixed amount in financial securities or instruments at regular intervals, regardless of stock market movements.

9. Premature withdrawals: Withdrawal of funds from a retirement plan before maturity or retirement age, whichever is applicable. Mostly, premature withdrawals are subject to penalties.

10. Inflation risk: Rise in prices of goods and services with time eats up the value of a rupee.

11. Lump sum: Contribution to an investment plan or receipt of returns in a single transaction, within one taxable year.

12. Installments: Contribution to an investment plan or receipt of returns in parts.

13. Matching contributions: Employer’s contribution to your retirement plan equal to your contribution.

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