Right from the day you were born, you had the need to feel secure. You were wrapped tight in the safe arms of your loved ones. They provided for your needs. You grew up to be a young adult, ready to take on the world. You started a family. You became a parent. You made sure that your children got the best education. You built a house. You bought a car. You took the best care of your parents. You made sure your family was secure.
Many times you go out of the way to make sure all family needs are met. You’re so involved in meeting immediate needs that you fail to see the big picture. Yes, retirement is the big picture. Needs, wants and demands are unending. So, how long will you postpone retirement planning?
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1. Investments should beat inflation: Ensure that your investment beats inflation because it eats into the value of your savings. If prices rise expenses rise. You’ll have to spend more to buy the same quantity of goods. Make sure your retirement plan earns real returns (adjusted for inflation).
2. Complementary: Retirement plan should complement existing retirement savings. If your savings are dominated by conservative instruments like FD, debt instruments and others. The retirement plan should have more exposure to higher risk instruments like equities.
3. Guaranteed pension: Your retirement plan should be able to generate good returns. Not only that, the pension must be guaranteed and meet both yours and your spouse’s needs. Should something untoward happen to you, a retirement plan should cater to your spouse’s needs.
4. Flexibility: Every year, you get a salary hike. Over the years, you keep progressing ahead in your career which earns you more income. Therefore, a retirement plan should give you the flexibility to pay higher premiums over the years. You may opt for plans which let you increase contributions through top-ups.
5. Equities are important: Equities add significant value to your investment portfolio. Other options like fixed deposits, bonds, etc don’t earn you as much as equities in the long-term. Ensure that your retirement portfolio has exposure to equities. You may consider investing in ULIPs, ELSS or directly in stocks if you have sound knowledge about the market.
6. Diversification is important: Equities yield great returns but carry higher risks than other investment options. Your retirement portfolio should not only have equity but also other assets like fixed deposits, bonds and gold. To earn optimal returns asset allocation must be done carefully.
7. Only Provident Fund is not enough: Contributing to provident fund (EPF and PPF) alone is not enough to guarantee a great retirement life. Only Provident Fund can’t beat inflation. As we discussed, a retirement portfolio should have investments spread over various assets.
8. Vesting age: Match the vesting age with your retirement needs. Vesting age for some pension plans starts at 50 years while other start paying at 65. When do you want to start receiving pension?
See Also: National Pension System
It’s not necessary to follow the crowd. Some might have several lakhs in banks while others might have crores. What about you? How much o you have? Some might have properties worth a fortune; some might have just one house. If you have crores of money in your bank account and if that’s more enough to support you and your spouse in retirement, there shouldn’t be any reasons for you to avail retirement plans. Subscribing to retirement plans is not a compulsion. There are alternatives to a retirement plan which you can consider.
1. Own a house: It doesn’t matter that you’ve to avail a home loan to own a house. Yes, you’ll have to keep repaying it for most of your working life. It is worth the effort. It does not only give you ownership rights but can also fund your retirement. How is that? Well, a reverse mortgage makes this possible.
A reverse mortgage is the opposite of a home loan. Home loan gives you money to buy a house. In reverse mortgage, you keep your house as a security with a bank. The bank, in turn, gives you money (lump sum or installments). You can easily fund your retirement with this money.
2. Rental income: You may be an owner of one house property. If you’ve closed the loan and have the capacity to avail a second home loan and repay it, you can acquire a second house property. Renting this house can earn you rental income. Having such properties at vacation spots can earn extraordinary rental income. Such rental income can support your retirement.
3. Agricultural income: You can buy an agricultural land and cultivate crops. Agricultural income is exempt from tax. Food inflation is mostly on the higher side. Hence, you can earn a lot and save this for retirement.
4. Royalty income: Write a book and the publisher will pay you royalty. The publisher has to pay you a royalty for using copyrights, trademarks and patents. You can also write newspaper columns or ebook.
5. Have passive income: If you have funds at disposal, lend it to business. If you have are an expert in your stream, you can be an advisor to a business. Consider partnership opportunities. You’ll be occupied and putting your knowledge to the best use. You’ll also earn income.
Arjun was a government employee. He retired in the year 2015 at the age of 60. His wife, Jeevana, was 55 years old and decided to join him. They had no children. Arjun received a pension of Rs 15,000 per month. His wife did not receive any pension. The couple had savings in their EPF accounts with which they each bought single annuities and arranged to receive Rs 15,000 each. They opted for ‘single life annuity’ option. As such, they would individually receive the annuity pensions. They didn’t approach any advisor as to how should they structure their annuity pensions.
Together, they started receiving:
Arjun’s Rs 15,000 + Rs 15,000 = Rs 30,000
Jevana’s Rs 15,000.
Together they received Rs 45,000 which was enough for them. In 2017, Arjun had a massive heart attack and couldn’t survive it. Jeevana lost her husband. She received 25% of her husband’s pension (Rs 3,750) but lost the annuity pension of Rs 15,000.
Jeevana was just 57 years old. On an average, the life expectancy of women is four times higher than men. Also, more than often, wives are younger than husbands. She had a long way to go. Jeevana’s income had dropped from Rs 45,000 to Rs 18,750.
What went wrong? Instead of choosing for a single life annuity option, the couple should’ve have opted for ‘joint life annuity’. The annuity would’ve paid Jeevana, the last surviving partner, an annuity throughout her life just like in case of joint life annuities.
How long would Rs 18,750 suffice Jeevana with inflation soaring at a high rate?
1. It is important to consider your spouse’s earning while planning for retirement.
2. Explore all the options of annuities or any other retirement plan. Choose the one which will give regular income to the surviving partner for a lifetime, whether or not they receive a regular income. Go for joint benefits.
Many people dream of retiring early, in their mid-50s. There’s nothing wrong with such an aggressive retirement goal. However, just a dream without any plan of making it work financially will only worsen things. Since there’s no ideal age of retiring, there’s no ideal age to start retirement planning.
Retirement planning is difficult but not impossible. If you only touch the surface of retirement planning, it will not serve any purpose. A retirement plan should have a solid foundation. If you don’t do a sound retirement planning:
1. Work until you die: If you don’t plan for retirement, you’ll have to work until you die. If you don’t start saving and investing now, your bank account balance will gradually decrease. You’ll have to continue working to add to your savings. Would you want to work till you die?
2. You drown in debt: If you spend more than what you afford, you’ll fall short of money to meet goals. You end up borrowing to make up for the difference. Say that you avail a home loan. Such a shame it will be if you haven’t availed insurance to cover the risk of you not being around.
3. Your family will be under stress: Say you plan to retire at 60 but have no proper retirement plan in place. Due to a medical condition, say you’re forced to retire sooner than planned. What then? You’ll have to spend your savings on medical expenses. You and your spouse will feel the cash crunch. You’ll have to live beneath your means. Are you ready to lead such a life?
4. Your financial future will go for a toss: Without a sound plan, not only your retirement but whole financial life will go for a toss. How long will you make ends meet with inadequate resources? Not planning finance can cause irreversible harm to your life.
6. You’ll have to depend on your children: Imagine changing your lifestyle according to your children and them making compromises to accommodate your needs. It may burden them even if they don’t make it obvious. Depending on your children in retirement can really be stressful.
7. You’ll have to sell assets: When you’re in dire need of money, the first thought that comes to mind is selling off a house, that which you built with great efforts and love. Due to lack of savings and plan, you may actually have to sell it off.
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