Retirement planning is the process of planning for life after work ends. It includes setting financial and non-financial goals and planning how to achieve them. Financial goals revolve around how much you want to save for each of your goals such as, at what age to retire, how much to save for retirement, where to live and so on.
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1. At the beginning of work life, retirement planning means setting aside money for retirement.
2. In the middle of career, it means saving and allocating money to various asset classes. It also involves taking the necessary steps to achieve expected return on investments.
3. On reaching retirement age, you don’t pay but your investments pay you.
A good retired life is the outcome of sound planning and monitoring. Nothing great comes instantly. People start worrying about retirement when they hit their 50s. You need to understand, retirement planning is a long process. It is not something that can be planned overnight.
1. Retirement planning is necessary to retain financial independence and maintain a comfortable lifestyle after you stop working. When no income flows into your bank account, it gets difficult to maintain the same standard of living as before.
2. You need a constant flow of income even after retirement. You might want to work in retirement to keep yourself occupied, but can you rely on that income?
3. You might want to have a great retirement life. To achieve it you’ll have to actually save and invest money regularly.
4. With growing age, you’re bound to develop health problems. Medical inflation is rising at the rate of 20% each year. If you haven’t saved enough for retirement, medical expenses will make a huge dent in savings.
5. Inflation is not under your control. No matter how much you earn, inflation eats up your money. If you can’t handle inflation with a good job today, what will happen on retirement?
6. You’ll not be free from responsibilities even in retirement. In fact, you’ll be your first responsibility. You might want to take vacations. You might have to get your children married. You will want to leave behind property or assets for them.
7. Life expectancy has gone up in the last decade. The longer you live, the more money you’ll need.
Let us read Devraj’s story. He had saved quite a bit for retirement, but something went wrong. What was it?
Devraj retired in 2005 when he was 50 years old. He had a great retirement plan. His wife was a homemaker. He had a daughter who had to be married off and son who lived abroad and was well-settled. Devraj was a proud man and didn’t want to be a burden on his children. His retirement portfolio was Rs 1 Crore. He had one home loan outstanding of Rs 5,00,000 and another of Rs 10,00,000. He had planned to withdraw 5% annually and live off that. Devraj wanted to enjoy a great retired life. He and his wife travelled and socialized a lot. Somehow 5% of their portfolio was never going to be enough. For most of the time, he had to withdraw a little more than planned.
Devraj had read that equities gave great returns in the long term. Though he had earned good returns, Devraj had overlooked the importance of asset allocation. He had invested in equities more than what he could afford to lose. He hadn’t assessed his risk capacity.
In 2008, Devraj portfolio suffered a major crash due to the Lehman crisis. Interest rates and inflation were on the rise. He had to pay higher interest on his home loans. He had lost close to Rs 7 Lakhs owing to the stock market crash and heavy spending was taking a toll on the retirement portfolio.
In 2010, Devraj hosted a grand wedding for his daughter which cost him around Rs 10 Lakhs. In a few months, Johnny and his wife gifted their children plots in a flourishing area worth Rs 25 Lakhs each.
When he looked at his portfolio, he was left with only about Rs 50 Lakhs. He was now 60 years and his wife was 55. Would the retirement portfolio be enough?
Lessons to learn:
1. Diversify your retirement portfolio. Invest in fixed income options like FDs and annuities to earn regular income.
2. With advancing age, you should move to less risky options. You don’t want the retirement fund to run out.
3. Don’t overspend. There’s nothing wrong in retiring early. But, keep track of your retirement portfolio. Monitor and make the necessary changes from time to time.
4. Make sure you pay off all your loans before retiring. If you keep paying off loans after retiring, EMIs will make a huge dent in the retirement corpus.
5. One good thing is to own two houses even if it means difficulties in making EMI payments during working life. In retirement, if you face a cash crunch, you can rent out one of the apartments.
Following are the common features of pension plans:
1. Guaranteed pension: Pension plans give a fixed and steady income after retiring, or immediately after investing, depending on the plan chosen. Thus, you can enjoy a financially independent retirement life.
3. Liquidity: Retirement plans have low liquidity. Some pension plans offer premature withdrawals subject to conditions like tax implications and penalties.
4. Vesting age: This is the age when you start receiving the monthly pension.
5. Accumulation phase: This is the phase where you have to make investments. Investments can be made in lump sum or installments. In this phase, investments accumulate and wealth is created. Generally, only a few plans allow withdrawals during this phase.
6. Payment period: This is the period in which you receive the pension after retirement. Most plans keep payment period separate from the accumulation period.
7. Surrender value: This is the value that you get on surrendering a retirement plan before maturity. This is not a smart move as you lose certain benefits of the plan including the sum assured and insurance cover (if the plan offers any).
8. Limited tax deductions: Retirement plans offer attractive tax benefits. However, the deductions are restricted to the ceiling limits of the respective sections of the Income Tax Act.
9. Taxation on returns: The maturity proceeds of most retirement plans are taxable.
10. High returns demand high risk: If you expect high returns and high-payout at the time of retirement, you have to assume high risk in terms of market fluctuations.
Following are the benefits of retirement plans:
1. Option in investment: Certain retirement plans give you the option to invest in government securities, debt and equities depending on your risk profile.
2. Long-term savings: Retirement plans are long-term savings schemes. Returns are assured.
3. Choose your payouts: You can choose how you wish to receive the annuity payments, either as a lump sum or installments.
4. Works like a life insurance cover: Certain pension plans pay a lump sum on retirement or on death, whichever is earlier. Pension plans work just like a life insurance plan.
5. Negates inflation effect: As retirement plans are for the long-term, the effect of inflation is negated.
6. Access funds during an emergency: Most pension plans allow you to access funds for emergencies.
7. Loan against retirement plans: Certain retirement plans sanction loan against the retirement corpus.
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