Retirement Planning

This is the first article coming in the Retirement Planning series that IndianMoney.com is publishing for our readers. Today we will discuss about the meaning, importance and advantages of Pension Planning. Our objective is to make aware all the people about the importance of Retirement Planning. We are sure that after reading this series of articles you will be able to take a better decision on your Retirement Planning.
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 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. A pension plan is 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 planning basically 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. Saving frequently 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. Two important kinds 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 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 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. 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 employers, Insurance companies, the government or other institutions such as employer associations or trade unions. Retirement pensions are classically in the form of a guaranteed Annuity. 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 insurance aspect 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. Types of pensions Employment-based pensions (retirement plans) Social / state pensions Disability pensions Employment-based 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 plans are therefore a form of deferred compensation.
Nuclear families 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. Inflation 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 returns. Job hopping With youngsters 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. No government 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 your Retirement. 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.
Inflation adjusted 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 figure are: Rate of return during accumulation stage (in percentage) Existing invested corpus Number of years to retirement Steps involved in determining the requirement for Retirement Plan 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. Step 2:Listing of present wealth and investments gives an indication of the gap accessible between the actual earning potential and the preferred expenditure Step 3:After identifying this gap plan investments hence which take closer to your preferred expenditures Step 4:The risks concerned in these future investments are of fundamental consideration. 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 retirement 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 and investments. 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 wrong. Systematic investment instills discipline and this is a key to accumulating a bigger corpus.
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 higher return. Mediclaim is 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. Sources of Income to Invest Following are the important sources of income, which will help you to invest in pension funds. Employment income Employer-Sponsored Retirement Plan Current Savings and Investments Other Sources of Funds Employment Income 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.
Employer-Sponsored Retirement Plan You may or may not join in a retirement plan during 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 plan. Current Savings and Investments Also consider what current savings and investments you 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 with greater ongoing contributions.