Retirement is one of
the major important life events many 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 perseverance. 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
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.
an assurance by a pension plan sponsor to a plan
member to supply a pension after your retirement. In
this article we'll break down the procedure needed to
plan implement, execute and eventually enjoy a
comfortable retirement. Retirement
is planning for a stable income after retiring from
regular work. It is an investment choice where the
returns are allocated after a gestation period.
Individuals investing in retirement profit schemes
usually earn pension over an extended period. Planning
for retirement earning is best done throughout the
course of regular job or practice. Savingfrequently
is the initial step towards planning for investment.
The earlier an individual starts saving the higher is
the amount of investment possible. All investments
yield interest and rate of interest earned on longer
terms generally outweighs inflation rates.
kinds of pension plans
Generally a Pension
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:
In a 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
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'sperformance.
In common a pension is an agreement to provide people
with an income when they are no longer earning a
regular income from employment. The terms retirement
plan or superannuation refer to a pension settled upon
retirement. Retirement plans may be set up by
the government or other institutions such as employer
associations or trade unions. Retirement pensions are
classically in the form of a guaranteedAnnuity.
A pension created by
an employer for the benefit of an employee is commonly
referred to as an occupational or employer pension.
Labor unions, the government or other organizations
may also fund pensions. Occupational pensions are a
form of deferred compensation generally beneficial to
employee and employer for tax reasons. Many pensions
also contain an insuranceaspect
since they often will pay benefits to survivors or
disabled beneficiaries while annuity income insures
against the risk of longevity. Other vehicles may
provide a similar stream of payments. The general use
of the term pension is to explain the payments a
person receives upon retirement usually under
pre-determined legal and or contractual terms. A
receiver of a retirement pension is known as a
pensioner or retiree.
/ state pensions
pensions (retirement plans)
A retirement plan is
an agreement to provide people with an income during
retirement when they are no more earning a steady
income from employment. Often retirement plans require
both the employer and employee to contribute money to
a fund throughout their employment in order to receive
defined benefits upon retirement. Funding can be
provided in other ways such as from labor unions,
government agencies or self-funded schemes. Pension
therefore a form of deferred compensation.
Social / state
Many countries have
shaped funds for their citizens and residents to
provide income when they retire or in some cases
become disabled. Normally this requires payments
during the citizen's working life in order to succeed
for benefits later on.
Some pension plans
will offer for members in the event they suffer a
disability. This may take the form of early entry into
a disabled member below the normal retirement age.
choosing a retirement plan
After deciding for
investing in a retirement scheme, it is significant to
understand the benefits of the same. The criteria for
selecting a retirement plan are:
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.
In addition to yearly
bonus, certain companies also pay terminal bonus.
A few companies supply
life coverage to investors and are always the improved
option compared to companies that do not.
The interest payable
is also 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.
effecting your retirement planning
However the key to retirement
is to begin early and gain the benefit of the power of
compounding. To start with, first explain why you
should start planning for retirement at a very young
age. Below given are the factors effecting your
government sponsored pension plan
As of 2007 the life
expectation at birth for males is 67 years and 71
years for females. With development in technology life
expectancy is likely to increase. As a result, you
will have to go for more number of years post
With age come health
problems. With health problems come medical expenses
which may makes a huge dent in your income post
retirement. Failure here could guide you to liquidate
(sell) your assets in order to meet such expenses.
Remember Mediclaim do not always be sufficient.
The days are gone when
people use to have a complete cricket team making a
family. Today's youth prefer not more than two
children. With westernization coming in, the
traditions of joint family are changing. They prefer
freedom and stay away from their family. Therefore
people have to develop a corpus to last them during
their retirement without any help from family.
As you require
worrying about it you need to account for it as well.
You need to take into account inflation while
calculating your retirement corpus as well as your
hopping jobs frequently they do not get benefit of
plans like super annuity and gratuity. Both these
require certain number of working years spent in the
service of an exacting employer.
sponsored pension plan
Unlike the US and UK where they have IRA (Individual
Retirement Arrangement)and state pension
respectively as social security benefit during
retirement, the government of India does not give such
benefits. So again it is your responsibility to fund
you start early for Retirement?
Let's take an example to know it better. Say X is 28
years and wants to retire at 60. She or he has 32
years to go (considering pension age as 60). If s/he
starts investing Rs 1,500 per month for the next 30
years then at the rate of 15 per cent (assuming s/he
is doing a systematic investment plan in equity mutual
funds) s/he will have a corpus of Rs. 1.03 crores.
Whereas if you don't begin at an early age and at 50
you decide to start investing then to have a corpus of
Rs. 1 crore you will need an investment of Rs 41,500
While this may not be probable starting your
retirement planning when young is. It is not needed to
start with a bang. You can start with small amounts
and raise it as your salary increases. Also if you
start early and you have time with you, you can gain
benefit of high returns and maximize your investments
by investing in equities or equity mutual funds.
know about the benefits of Pension Plans
would you require at retirement
There is no single number that would assure everyone a
sufficient retirement. It depends on many factors
counting your favored standard of living, your
expenses including any medical costs and your target
retirement age. It is totally possible to decide a
sensible number for your own retirement needs. All it
involves is answering a few questions and doing some
number crunching. As long as you plan ahead and
estimate on the conservative side it is completely
probable for you to collect a savings enough to last
you throughout your golden years.
Your first step in the procedure is to decide the
amount you will need to maintain through your
retirement. Research shows that normally 80 to 90 per
cent of a person's pre-retirement income suffices to
preserve her/his current standard of living. You might
argue that your standard of living is bound to go
higher with raise in your income and so will the
expenditure. Hence you have to take into account raise
in your annual income over the years. The components
to be taken into account when calculating your
retirement corpus/returns are:
Your current age
age of retirement
annual growth (in percentage) in income
income at retirement age
of return on retirement corpus (in percentage)
rate of return/Real rate of return (in percentage)
After calculating your retirement requirement the next
step would be to find the amount essential to save to
reach there. The components involved to derive this
of return during accumulation stage (in percentage)
of years to retirement
involved in determining the requirement for Retirement
Step 1: It
is very significant to work out the intended expenses
after retirement. Planned expenses vary from
individual to individual and from one city to another.
of present wealth and investments gives an indication
of the gap accessible between the actual earning
potential and the preferred expenditure
identifying this gap plan investments hence which take
closer to your preferred expenditures
risks concerned in these future investments are of
Step 5: A
constant review of available investments helps to mix
and match future retirement income plans.
Retirement advantage investment plans are offered by
banks, non-banking financial institutes and government
agencies. In many countries post offices also expand
retirement investment plans.
How to find
the size of savings you'll need in order to fund your
The reason behind listing these components is to
clarify that it is not merely accumulating Rs. 1 crore
for retirement. The right retirement corpus is one
which helps you preserve your standard of living even
after retirement. There are several key tasks you
require to complete before you can decide what size of
savings you'll need in order to fund your retirement.
These include the following steps:
Step 1: Choose
the age at which you want to retire.
Step 2: Decide
the yearly income you'll need for your retirement
years. It may be wise to estimate on the high end for
this number. Normally speaking it is reasonable to
assume you'll need about 80% of your current annual
salary in order to maintain your standard of living.
Add up the current market value of all your savings
Step 3: Determine
a practical annualized real rate of return (net of
inflation) on your investments. Conservatively assume
inflation will be 4% annually. A realistic rate of
return would be 6-10%.
Step 4: If
you have a company pension plan, gain an estimate of
its value from your plan provider.
Step 5: Estimate
the value of your social security profit.
Two things to
Remember about Pension Plans
- Give every year to your pension fund; you might
want to skip a year's payment thinking that skipping a
year will not make much of a difference. You might be
discipline and this is a key to accumulating a bigger
- Resist the temptation to withdraw. If you are not
capable to contribute after 15 years since of some
personal problems do not remove money from your
retirement savings and let it grow for the next 15
years unless in case of extreme emergency.
Planning for your retirement is an on going process.
It requires discipline, self study and time. The
earlier you start the better it is as you can gain
from the power of compounding as well as aim for a
one of the main important aspects of planning.
Remember that medical expenditures are never foreseen.
Mediclaim supports us in emergencies. At times it may
not be enough but it certainly offers a buffer. So it
is very important to check that your Mediclaim premium
is paid every year and it does not lapse.
Income to Invest
Following are the important sources of income, which
will help you to invest in pension funds.
Savings and Investments
Sources of Funds
As you grow through your working life, your yearly
employment income will possibly be the largest source
of incoming funds you receive and the major component
of your contributions to your retirement fund. For
your retirement plan simply mark down what is your
after-tax yearly income is. Then deduct your annual
living expenses. The amount left over represents the
discretionary savings you have at your removal.
Depending upon how the numbers work out you may be
capable to save a large part of your employment income
toward your retirement or you may only be capable to
save a little. Be sure to use a budget and comprise
all your recurring expenses. One way to guarantee you
save the projected amount for retirement is to treat
the amount you plan to save as a recurring expense.
Regardless figure out the maximum amount of your
employment income you can give to your retirement fund
each year. Also if you are capable to work part time
throughout your retirement years include this
information in your retirement profits calculations.
For example let's think that Harsh's after-tax
earnings are Rs.34,000 and her living expenses are
Rs.2,000 per month or Rs24,000 per year and that she
will not be working during her retirement. Thus Alison
has 10,000 per year of optional savings. She can
decide to contribute all of this money to her
retirement plan or she can give a portion of it to her
retirement fund and spend the rest on a vacation or
something else she desires but we know that her
available retirement funds from her employment income
add up to 10,000.
Employer-Sponsored Retirement Plan
You may or may not join in a retirement
your employment. If you don't, you will require
focusing on your other income sources to fund your
retirement. If you do participate in an employer plan
contact your plan provider and acquire an estimate of
the fund's value upon your retirement. Your plan
supplier should be able to give you an estimated value
of your retirement funds in terms of a monthly
allowance. Obtain this number and add it to your list
of retirement income sources.
Similar to your social security profit the funds from
your employer plan can help cover your living expenses
during your retirement. However most employer plans
have rules regarding the age at which you can start
receiving payments. Even if you quit working for your
company at age 50. For example your employer plan may
not permit you to begin receiving payments until age
65. Or they may allow you to start receiving payments
early but with a penalty that reduces the monthly
payment you receive. Talk to your plan provider to
decide what rules apply to your employer plan and
consider them when you are making your retirement
Savings and Investments
Also consider what current savings and investments
have. If you previously have a great investment
portfolio, it may be enough to cover your retirement
needs all by itself. If you have yet to start saving
for your retirement or are coming into the retirement
planning game late, you will require to compensate for
your lack of current savings
greater ongoing contributions.
For example with Raj's retirement plan he previously
had a Rs. 100,000 retirement fund at age 40.
Reasonably assuming this fund grows at a real rate of
return of 6% per year until he is 65, Raj will have
about Rs. 429,200 in today's Rupees by the time he is
65. Depending on other sources of income he has could
be sufficient to fund his retirement so that Raj does
not have to give large amounts of his ongoing
If you do have current savings and investments are
sure to comprise only the portion you expect to have
left over by the time you have reached retirement.
Don't include any portions you're planning to leave
for your children or spend on other assets such as a
summer home which will make the funds unavailable for
covering your living expenses.
You might have other sources that will be obtainable
to fund your retirement needs. Perhaps you will get an
inheritance from your parents before you reach
retirement age or have assets, such as real estate
that you plan to sell before retiring. Whatever
additional sources of funds you do happen to have been
sure to comprise them in your retirement projections
only if they are certain to occur. You may be
expecting to realize a large inheritance from your
parents but they may have other plans for their
surplus savings such as donating them to charity.
Other unexpected cash inflows may also come along as
you build toward your retirement such as lottery
winnings, gifts, raises or bonuses, etc. When you do
occur to receive these additional cash inflows,
believe adding them to your retirement fund.
through that you can contribute to your Retirement
Linked Pension Plans (ULPP)
Investment Plans (SIP)
In the next article we will discuss the feature,
benefits, types and comparison of Unit Linked Pension
Plans (ULPP) with other kinds of Pension Plans.