You probably enjoy going to work every morning in order to earn a stable salary for your family. The money allows you to put food on the table, educate your children and maintain a high standard of living. However, a time will eventually come when you have to retire from your current job. During this phase of your life, you obviously want be financially independent and maintain the decent lifestyle you have always enjoyed. However, the pension your employer is likely to provide might not be enough to achieve this objective. You will need an additional source of income to supplement the pension. This is where prudent retirement planning can be helpful and a smart move too!
What is a retirement plan?
A retirement plan is a financial scheme where you regularly deposit a portion of your savings throughout your working life. However, you can only claim the funds and accumulated interest it generates as an income on your retirement. This stream of money allows you to live a financially stable life at the end of your working days. You even will be able to meet the medical expenses most people associate with the onset of old age.
Investing in a retirement planning scheme is important for the following reasons:
- Provides you with an income source on your retirement,
- Inculcates the habit of saving in you,
- Allows you to claim tax benefits on the regular premium deposits to the scheme,
- Enables you to live a comfortable life throughout your retirement despite rising costs, and
- Provides you with the money to help you fulfil your life-long aspirations like buying a holiday home.
How do most retirement plans work?
Retirement plans are financial schemes designed to enable you to save money and earn interest on accumulated funds. It starts when you actually buy one which suits your specific needs. You then need to make regular contributions in form of “premium” payments to the scheme until your retirement. The amount of this premium depends on many different factors. These include:
- The duration of the scheme,
- Your earning capacity and income level,
- Your age at the time of buying the retirement plan,
- Whether it provides a life insurance cover as per its specific terms and conditions, and
- The tax exemptions you can avail by investing in the retirement plan.
Once you retire from your present job, the premium contributions to the scheme stops. Then, you can avail three options according to your requirements. These are:
- Withdraw the entire funds and accumulated income on the scheme as a lump sum;
- Receive a regular income stream from the scheme which continues until your death; or
- Withdraw a portion of funds as a lump sum and receive a steady income on the balance.
Types of retirement plans
Are you considering retirement planning? The most popular plans for 2021 which you can consider investing in are-
- Deferred Annuity
This retirement scheme enables you to accumulate a substantial fund either through a single or continuous premium payments. You have to make these deposits during the duration of the scheme. At the end of the policy’s term, you start to receive a regular monthly income in form of annuities.
- Immediate Annuity
Under this retirement plan, you need to pay a single lump sum premium at the time of buying the scheme. You can start to earn a steady monthly cashflow as income via annuities. Moreover, in the event of your death, your spouse gets the money.
- Guaranteed Period Annuity
In this particular retirement plan, you receive an annuity payment for a specific period of time, say 20 years. The premium payments generally differ from one scheme to another. However, your family members will continue to receive this income regardless of whether or not you survive between this duration.
- National Pension Scheme (NPS)
NPS is a Government of India sponsored retirement plan which you can participate in as a policyholder. Your money in the form of premium payments is put into equity or debt investments schemes to generate returns. On your retirement, you can only withdraw 60 % of the accumulated funds and interest. The Government uses the remaining portion to buy a suitable annuity which generates an income for you.
How to plan for your retirement?
Retirement planning is a continuous process which evolves over time throughout your career. You can plan for your retirement at any stage of your working life but it is prudent to start early. This is because you will need to accumulate sufficient funds to lead a financially stable retirement. To do so, you need to seek answers to the following questions:
- At what age do you expect to retire from your current occupation?
- What will be your financial goals once you retire?
- Which retirement plan should you invest in to accomplish those goals?
- Will the retirement scheme generate enough funds to compensate inflation?
- Which of your nearest family members do you wish to nominate to the scheme? and
- What are tax implications on the income you receive from the scheme on retirement?
Investing a suitable retirement plan is one of the most prudent financial decisions you can make. The returns from the scheme allow to maintain your financial independence once you retire. However, you should always thoroughly read the terms and conditions of any policy before shortlisting it. This will give you an insight into its benefits and potential market risks. You can then decide whether it suits your particular needs. However, if you still have any confusion on the matter, it is best to consult an experienced financial consultant in the field.
