Investing towards Retirement - Dipika Jaikishan

Investing towards Retirement

Do not delay investments for your Retirement. Investing early will help you to build a large corpus that would make sure you are financially independent and secure during your Retirement Days. You have worked hard, now its time to make it work you.

Retirement Plan

Pension or Annuity for your retirement corpus?

Pensions and annuities are two great kinds of retirement income. But don’t confuse one with the other. They are two different instruments with their own advantages and disadvantages. Let us see what they are and which one would be more appropriate.

What is a Pension?

It is a type of retirement account which is mandatory for Government employees but is also recommended for private-sector employees to secure their retired life. The fund is opened and maintained with regular contributions throughout employment.

Some companies offer pension to their employees as part of the job (Employees’ Provident Fund or EPF) while others can voluntarily opt for other pension schemes (PPF/ NPS). In the case of private sector employees, the employer manages the contributions and payouts, which is one less worry on your end. Even if the company suddenly goes bankrupt, the Pension Benefit Guaranty Corporation will try and get you your pension as much as they can. You may not get the entire amount but you will still have most of it.

An important feature of pension is the tax exemptions as you receive the payments on your retirement under Section 80C (PPF, EPF, NPS, etc).

As far as maturity is concerned, you generally have two options.

  1. You can receive monthly payments which give a regular source of retirement income.
  2. You can choose to get your pension as a lump-sum amount. This way you can get the entire amount at once and use it as you like.

At the time of your retirement, you receive payouts regularly or in a lump sum, depending on the scheme that you opt for. The amount you receive depends on several factors like your age, salary and the duration of your employment.

What is an Annuity?

It is similar to an insurance scheme. You make a deal for a stipulated amount of money and pay the money at one shot or through deposits regularly. Your money is invested in mutual funds, stocks or bonds. The specifics like the amount you receive, maturity, etc. are set by you. When the time comes, if you retire or not, you start to receive your payments from the annuity.

A big advantage of annuities is that if you use your income-after-taxes to fund the annuity, then your pay-outs are totally tax-free. Suppose you exhaust your pension completely, you can open an annuity that lasts till your death.

Conclusion

On the whole, a pension needs very little planning on your part because it is likely to make most of the payouts as the law protects pension payments. Whereas with an annuity you receive a fixed stream of payments by buying it with some or all of your pension ‘pot’.

When it comes to deciding which of the two is ideal for you, it is best to look at your lifestyle, planned retirement corpus, spending capacity, etc. It will help you understand which one is more beneficial for your retirement as per your requirement and circumstances.

retirement

How to plan your Retirement

“Old age is like everything else. To make a success of it, you’ve got to start young.”

-Theodore Roosevelt

In India, the most common beverage consumed is a cup of hot tea. It is served in the house, every morning, evening and sometimes even at night. A cup of hot tea is comforting and each person has their own way of making tea depending on their tastes. Such is the case of saving money. Many people do it in a different way. Now one of the most mundane of all saving is that of retirement. When approached with the subject people wave it off saying they’ll probably never retire or they will be well taken care of by their dependents. But like they say, your parents are not your emergency fund and your children are not your retirement fund. That’s why planning for your savings is crucial for maintaining your lifestyle even after you retire at that time.

So how does a person begin to plan for retirement? Well, there are two important points to keep in mind:

Your Spending

Every person’s individual spending habits vary. Some spend on food while others spend on clothes, some spend on their trips to exotic places while others spend on furnishing their dream home. One of the most important things to remember is that what you spend now will only increase in the years to come thanks to the constant inflation. So, in order to plan for what you spend after you retire to take a hard look at how much you spend these days. Try and anticipate how it will grow over the years while taking into consideration the inflation in the market. An easy way to do this is using the Rule of 72 which states that if you want to know how long it will take to double your money at 6% interest(inflation), divide 72 by 6 and get 8 years. Knowing this will instantly give a clear picture on what you need to do rather than leaving it up to chance to figure it out.

Your Saving

Now it comes down to how much a person must save. Many already have savings like FDs and Provident Funds so it can vary in terms of that. But when it comes to stocking up for your retirement there is a formula that will work wonders for you. Based on the age you are you save up that percentage of your income (after taxes). If you are 25 you should put away 25% of your income, if you are 30 you must put away 30% of your earnings. This should begin as early as you start to earn right until you are 55 or 60 years old.

Say you are 65 when you finally give yourself a break and want to sit back and take the load off. You will have children who take care of you and dependants that are always with you. Would it be better to still be standing on your own and do whatever you want rather than be totally dependant on others? You can use the money to pay your bills, go on that trip you planned for, buy your dream house, even pay for your dependent’s emergency needs at times.

Retirement isn’t just another option, it’s a need. So don’t delay, choose a way to save up for your retirement. The money you save today is like a bag of tea that is stored up until the right time. When you finally retire you can have a hot cup of strong tea. However, if you don’t plan for it and save up, you will have only a weak tea that gives no energy or comfort whatsoever.