Retirement Income Planning: Strategies you need to know

Retirement Income Planning

Retirement is one of the important life events all of us will ever experience. From both a personal and financial viewpoint, realizing a comfortable retirement is an extremely extensive procedure that takes sensible planning and years of determination. Even once it is reached; managing your retirement is an ongoing accountability that carries well into one's golden years. Although all of us would like to retire happily, the difficulty and time required in building a successful retirement plan can make the whole procedure seem nothing short of daunting. However it can often be done with fewer headaches and financial pain than you might think - all it takes is a little homework a possible savings and investment plan and a long-term commitment.

What is the Retirement Planning?

According to Maslow a person has five types of needs such as physiological, safety and security, social, esteem, self actualization. Aged people have social and security need. It does not mean that they had not felt this need before; they had felt it and had satisfied it too. But with the passage of time they spent the major portion of their earnings either in their children or in building a home of their own or in their parents etc. this situation is seen in most of the Indian homes. As we reach our old age then we realize that the time and money that they have saved for themselves may not be sufficient for them to lead a tension free life after the retirement. In this case it becomes the duty of their children to see that their parents do not face too many financial problems.

Types of Pension Plans

Generally a Pension Plan is a way in which an employee transfers part of his or her current income stream towards the retirement income. There are two main kinds of pension plans:

• Defined-benefit plans

• Defined-contribution plans.

Defined-benefit plans

In defined-benefit plan the employer guarantees that the employee will be given a definite amount of benefit upon retirement regardless of the performance of the underlying investment pool.

Defined-contribution plans

In a defined-contribution plan the employer makes predefined contributions for the employee but the final amount of benefit received by the employee depends on the investment's performance.

Planning for your Retirement: Factors to be considered

Following are the major factors to be considered while opting for a retirement plan.

• Current Age

• Age of retirement

• Expected life after retirement

• Annual income at retirement age

• Rate of return on retirement corpus

• Inflation rate

Current Age

Your current age is an important factor that affects the retirement planning. If your current age is below thirty, you have enough time to contribute to your retirement. At the same time if it is above thirty the gap between retirement and your current age is less. So it is better to start investing as early as possible. The early you start the benefit will be more.

Age of Retirement

Age of retirement is the age which you are planning to retirement. The difference between age of retirement and your current age is the period during that you can invest for your retirement. You can choose the retirement age as you wish. It can be 50, 55, 60, anything.

Investment Period = Retirement Age – Current Age

Expected life after Retirement

Life expectancy is the expected period of your life. The difference between retirement age and expected life is the period during which the company has to pay your annuity. If the years after retirement are more, you need to pay more premium/ contribution.

Annual income at Retirement Age

While going with a retirement plan you should consider your income at the time of retirement (no doubt it will be more than your present income) because as the income increases your standard of living also will increase. So try to choose an annuity that will help you to continue your life with same standard of living.

Rate of return on Retirement Corpus

Before investing in a retirement plan, consider the rate of return provided by the plan. Because investing in a place that is not able to generate decent returns will not help you to continue the same standard of living after retirement. 

Inflation rate

Inflation is the factor that decreases the value of money. So be smart enough to choose an investment that provides you more returns to cover the threat from inflation.

See Also: Financial Plans For Retirement Benefits

Retirement Planning Strategies

Below given are five simple steps to keep in mind while choosing retirement plan.

Step 1: Decide how much income you require to live happily in your post-retirement years. Remember to take into account factors like increased medical expenditure, vacations, gifts for family, etc.

Step 2: Find out how much you need to save regularly, starting from today. You can use retirement calculator to determine the retirement amount you need.

Step 3: Select the right retirement plan that allows you to meet your post-retirement requirements. Preferably invest in plans which can provide you with potentially higher returns in the long run.

Step 4: Start saving now so that YOU can enjoy the power of compounding. The sooner you are starting the higher your savings will be.

Step 5: Invest a fixed amount every month for your post-retirement years. Systematically investment will help you to multiply tour investments multifold.

Choosing a retirement plan

After deciding to invest in a retirement scheme, it is significant to understand the benefits of the same. The criteria for selecting a retirement plan are:

• Bonus

• Terminal bonus

• Life coverage

• Compounded returns

Bonus

Bonus is an important measure for choosing a retirement policy. Some companies pay bonus on the total money invested while others pay bonus on the premium amount.

Terminal bonus

In addition to yearly bonus, certain companies also pay terminal bonus. Make sure you prefer the plan with terminal bonus.

Life Coverage

A few companies provide life coverage to investors and are always the improved option compared to companies that do not.

Compounded returns

The interest payable can be simple or compounded. Since compound interest is always higher on a given main sum compared to simple interest, investing in a plan yielding compounded interest is preferable.