Everyone has to retire from work at some point in their professional life. Some have the luxury of knowing the day they will retire. The day they will get up to ‘not going to work’ with a lot of free time on their hands. While for some, it might happen suddenly with no time left to plan. Retirement planning is vital for that morning and several mornings that come after that.
When there are a host of investment options at your disposal, the choices that you make need to be measured and judicious. Retirement planning is an important aspect of your overall financial plan. You simply cannot afford the risk of running out of money in your retirement years.
Thus, in addition to your regular savings, you must specifically chalk out a retirement plan that can cover your regular expenses in this phase and also provide a little extra to pursue your hobbies. In order to make the best investment decision, you must understand the relative pros and cons of various retirement investment instruments. Retirement/retirement plans can be a good investment for you and should form a part of your retirement planning. However, do go through the pros and cons to understand whether this investment tool is for you or not.
Apart from the type of retirement plan, you must also consider the following factors if you are planning to retire early:
- Monthly expenses: Your day-to-day living expense is the main thing you must consider while planning your retirement. Once you retire, your regular source of income is cut-off. In this case, you need to think about your family’s regular monthly expenses. You need to build a corpus big enough to take care of these expenses. Apart from monthly expenses, you also need to allocate sufficient funds for your post-retirement activities. For instance, if you wish to travel every year, your annuity must cover these expenses and help you save money for travel. If the income from your retirement plan is not sufficient, it could seriously affect your post-retirement plans.
- Inflation: When you are calculating your monthly expenses, do not make the mistake of calculating it based on today’s expenses. The cost of various things could increase drastically over the years. Hence, it is important to make sure that you take inflation into consideration while calculating your monthly expenses. Even a conservative estimate of 5% to 6% inflation per year could help you arrive at the near approximate amount you need in the future.
- Life expectancy: There is no way to predict how long a person is going to live. Hence, your retirement corpus should be large enough to support your needs during your old age. Running out of money during the ripe old age is one of the worst things that could happen to anyone. Some annuity plans pay throughout one’s life, and some plans pay only for a specific period. Evaluate your requirements carefully before you decide on which type of policy to purchase.
- Rate of interest: The returns offered by various retirement plans differ significantly. If you are building a corpus from a very young age, you need to understand the rate of interest while calculating the returns offered by a policy. Most of the life insurers in the market have premium calculators that could help you determine how much you can earn from a specific retirement plan.
- Major expenses: There are certain major expenses you might have to encounter once or twice in life. For instance, you will have to pay for your children’s higher education and marriage. If you don’t have provisions for these expenses, your post-retirement plans will be drastically affected.
- Medical expenses: When people retire young, they tend to ignore their future medical expenses. As you get old, you may have to end up spending a lot of money on medical checkups and treatments. If you have a health insurance cover, you need to consider the premium expenses. Also, it is essential to have adequate provisions for unforeseen medical expenses you may encounter in the future.
- Assets and loans: Another major thing you have to consider is your current assets and outstanding loans. If you have outstanding loans, you should find a way to pay off these loans within your productive years. If these loans are not paid off, it could take away a chunk of your annuity income.
Here are seven reasons why retirement planning should be on your priority list:
- The money saved for your retirement can help you tide over any untoward circumstances, be it health-wise or wealth wise, in the future.
- You will be able to meet the needs of your family –from education to monthly expenses– that may be dependent on you even after retirement.
- Not to forget, you can even fulfill your wish of traveling the world – all with the help of your own hard-earned money. This retirement fund will take care of your expenses.
- More than anything else, you will not have to depend on anyone financially if your retirement planning is spot on.
- You can be a big contributor to your family’s demands. From gifting something big to funding for your grandchildren, you can choose to help your loved ones, all thanks to sufficient retirement funds.
- Gone are the days when life expectancy was only 60. With a change in lifestyle, the average life expectancy has increased as well. So, naturally, you will need more funds for your future.
- Most importantly, you may not have the zeal to work for long. If you have retirement planning done at an early stage, you can make a call to bid goodbye to your workplace as per your choice instead of the work bidding goodbye to you.
Advantages of retirement plans
Opportunity to diversify across asset classes – most retirement funds give investors an option to choose the asset class to which they would like maximum exposure. As an investor, you can choose amongst pure debt, pure equity, or a mix of debt and equity.
Benefits of long-term investing – since these schemes invest in the long-term, your investments can reap the benefits of long-term investing. Retirement plans ensure that a good corpus is accumulated by the time you retire and create an annuity that can provide a steady flow of cash post your retirement.
Multiple options for payment – retirement schemes usually offer investors a great deal of flexibility in terms of how they want to make the payments. Investors can choose to invest a lump sum amount and receive immediate annuity payments, or they can choose a deferred annuity plan, which will let their corpus earn more interest until the payouts begin.
It can provide the benefits of a life-insurance cover – certain retirement plans offer a life cover as well in which a lump sum amount is paid to the family member/nominee at the death of the insured.
Access to a lump sum amount during an emergency – investors are allowed to make certain adjustments to their retirement policy and access funds in case of an emergency. These emergencies are pre-defined.
Disadvantages of retirement plans
Limited tax deduction – while investments in a retirement plan are available as a tax deduction under section 80C of the Income Tax Act, 1961, the maximum allowable deduction is Rs 1,50,000.
Taxation on the annuity – annuity received post-retirement, is taxable in the hands of the receiver.
Best suited for early investors – in order to reap the full benefits of a retirement scheme, it is imperative that the investor starts contributing to the scheme as early as possible.
National Pension Scheme, Pension Funds, and some special funds are easily available with most of the Financial Institutions. I personally suggest buying LIC Jeevan Shanti for your retirement. LIC is one of the safest asset manager ones can get in India.
Content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. The Author is not a registered Advisor or a legal entity.
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