Investment Planning
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Early Retirement Planning For Your Future

Introduction

Retirement planning ensures that you will continue to earn a satisfying income and enjoy a comfortable lifestyle, even when you are no longer working. An increasing number of young Indian professionals are moving away from the traditional joint family structure. Since support no longer comes easily, parents have realized the need to provide for themselves during their retirement years.

A retirement scheme such as an employee pension plan is sponsored by a company for their employees with varying levels of employer-employee percentage contribution. As an employee, you have some say and rights as to the type of pension plans you and your employer will invest in. Every detail of your arrangement is guided by the employer’s policies and procedures. In Canada, they have the Canada Pension Plan (CPP) wherein contributions can provide a stable and dependable pension upon retirement. The investment contributions can also provide the pensioner and beneficiaries with some financial protection in case of death or disability.

Retirement-Planning

Until recently, many young Indians in their 20s and 30s were ignorant about retirement planning and were not taking it seriously. For them, retirement was something that was too distant.

However, smart advertisement campaigns by private life insurance companies like ICICI Prudential’s “Retire from Work, not from Life”, HDFC Standard’s “Retire with Pride, Live with Self Respect”, and more recent one from Agion Religare “How much pension will you need? Know your Correct Pension amount.” have helped in increasing the awareness about retirement planning.

Your retirement planning does not end once you have taken a retirement plan from any of these Insurance Companies. It’s just a beginning, and if you start at an early age it is extremely helpful. Still, wondering why you need a retirement plan?

Why Do You Need Retirement Planning?

Here are some of the reasons :

Inflation:-

Due to inflation, the value of money keeps decreasing year on year, so the value of Rs.100 five years ago was much higher than the value of Rs.100 today. As you need to worry about it, you also need to account for inflation-adjusted returns on your investments, while planning for your retirement.    

Increasing Life expectancy:-

Increased longevity has been the greatest single benefit to Indian citizens since independence, a benefit spread across all states and income levels. The life expectancy, as on 2007, for males at birth, is 67 years and 71 years for females. The globalization of modern medicine and medical practices has globalized high life expectancy too. Increasing life spans make it critical for people to plan for 25 + years of retirement, inflation continues to erode savings, and interest rates continue to moderate as the Indian economy matures. What should you do if you are intent on having a pleasant retirement? 

Medical emergencies:-

With age come health problems. With health problems, comes medical expenditure which may make a huge dent in your income post-retirement. Failure here could lead you to liquidate (sell) your assets in order to meet such expenses. Remember medical insurance does not always suffice.   

bonds investment

Changing Social Structure:-

The culture of joint family is changing. Today, an increasing number of young Indians are staying away from their families due to employment. Hence people have to develop a corpus to last them through their retirement without any help from family.   

Absence of Government sponsored pension plan:-

Unlike the US and UK where they have Roth IRA and state pension respectively as social security benefits during retirement, the government of India does not provide such benefits. Only 4% of India’s working population- mostly government employees – are covered by pensions. The remaining 96% comprises self-employed and salaried professionals who do not have a formal, mandated provision for pensions.   

Create Portfolio:-

The riskier assets like stocks and equity-based mutual funds could form a larger portion of your portfolio when you are younger (say 70%) and move to a more stable portfolio as you arrive at your 50s (deposits, real estate, and bonds forming most of your portfolio).

Job hopping:-

With youngsters hopping jobs regularly they are unable to get any substantial benefit from plans like super annuity and gratuity. As both these plans require a certain number of working years spent in the service of a particular employer. 

Plan Tax Wisely:-

Tax benefits are one of the major advantages of having an early retirement plan. By investing your income in infeasible plans, you get to save some tax. Furthermore, retirement plans help you diversify your tax payments. Every rise in price is affecting your cost of living. leaving a dent in your savings and investments. The reason is, that with the rise in inflation. The amount you save or invest from your income every month may not rise at the same rate. Therefore, the rise in price puts extra pressure on your savings and investments. So you must increase the amount. you are investing for your retirement every year to keep up with the rising cost of living.

There’s no easier way to begin retirement planning than by saving through workplace retirement accounts like Employee Provident Fund and Family Pension Fund and diversifying it, on your own, by taking adequate insurance cover and investing in a mix of asset classes.

Stages of Retirement Planning

Below are some guidelines for successful retirement planning at different stages of your life.
  1. Young Adulthood (Ages 21–35)
  2. Early Midlife (Ages 36–50)
  3. Later Midlife (Ages 50–65)
Retirement planning through a pension scheme guarantees regular income to the policy owner in the form of an annuity or pension.

Factors to be considered while investing in a Pension Plan:

  • Compare the premium in various pension schemes and then select the one that best suits your requirements.
  • Check whether the plan is with the cover or without cover. The former offers the sum assured to be paid to the nominee in the case of an eventuality, while in the latter case there is no sum assured and the nominee receives only the amount net of unpaid premiums and expenses.
  • Check the performance of the various pension schemes offered by the insurer.
  • A traditional pension scheme invests a considerable portion of the premium in government securities (G-Secs) and bonds, thus yielding low returns. Comparatively, investing in a ULIP pension plan provides higher returns (if the investment in ULIP is well diversified).
  • Investment in a ULIP pension insurance policy should be made only after considering the various charges involved like allocation charge, fund management charge, etc.
  • Check the charges and deductions applicable on surrendering the policy before maturity in case of emergencies.
  • Check for tax benefit provisions in the Pension Plan. Premium payments towards a Pension plan are eligible for rebate under Section 80CCC.
There are also some initiatives taken up by the government to promote old age income security, like New Pension Scheme (NPS). It is a defined contribution-based pension plan. The NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA)

 

Bonds for safety

Bonds are another popular investment for savers as they can move a lot less in price than stocks. Investors lend money to a government or company in exchange for an annual payment based on a predetermined interest rate. At the end of that bond’s term — usually between one and 30 years — you get back your original investment. Bonds are popular with investors because they offer a guaranteed annual income and a reduced risk of loss, depending on the type of bond you buy. Because of this, bonds tend to fluctuate less than stocks. so they balance out a portfolio’s overall ups and downs.

 

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