Imagine a situation where you are in your sixties and left with no savings in your account! It would be very difficult for you and your spouse to fulfill your daily needs and forget all post retirement dreams. It will be extremely difficult to sustain the remaining part of your life with no further sources of income. To avoid such a situation and live life to its fullest even after your retirement one has to start planning today, infact right now! This article will highlight the importance of retirement planning and how to go about doing the same, so Read on…
Retirement planning is a multidimensional field. Many planners approach retirement planning from only an investment point of view, but this narrows the definition of retirement planning. It’s much beyond it. For an effective retirement planning, the planner must discuss the following factors which would give the platform for the type of planning to be done:
Employer provided retirement plans, social security measures available, taxation issues, insurance coverage, investments, health care requirements, and changes in lifestyle. So now we can say that retirement planning is setting aside the funds during the time of earning for securing the future from the unforeseen risk.
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Importance of retirement planning
Let us now understand why it is important to plan for retirement. Though the aim of each plan is to have a more comfortable life, various stages of life require different kinds of planning. One of the stages of life which requires careful planning is retired life. In fact, achieving what is anticipated in retired life is the most difficult part of financial planning in today’s scenario. It is due to the changes in the economic environment, the changes in the world of medical science and the increased longevity that add to many woes of the person in their retired life.
It sounds ironical that increased medical facilities and certain advancement made in the world for the betterment of the people is the reason for ones worries, but it’s true. Due to increase in medical facilities it has increased the life expectancy rate of the people which means the amount of money spend on medical aids have been increased and this is one reason for expenses after retirement to increase. Also working life of the people has been reduced as education sector is growing so fast that there is a pool of fresh knowledge available. So the earning years of a common man has also been reduced. These are a few reasons which make the retirement planning very crucial.
Objectives of Retirement planning
a) Maintaining pre-retirement style of living: The first and foremost objective of retirement planning is to maintain the pre-retirement style of living in spite of the stoppage of income from employment. Generally people do not like to minimize or eliminate the consumption of necessities to curtail costs even after retirement. Some people like to stay in the same area where they are staying, some want be the part of the same clubs they use to be, many are interested in travelling etc. Planning for all such activities is also important along with planning for household expenses viz. food, shelter and clothing.
b) Financial independence: - This is an important factor which makes the retired life enjoyable. If a person remains self sufficient, he can enjoy all amenities i.e. to relax, to play or to go to the pleasure trips. To be self sufficient throughout the lifetime, individuals sometimes cut their spending after retirement.
c) Minimizing Taxes: - This should also be one of main objective of the client. It should be planned in such a way that they have to pay minimum amount of tax. This can be achieved through tax savvy investments or tax shelter opportunities with retirement funds.
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d) Early Retirement: - If someone opts to retire early he should plan accordingly. Since his service period will be lower he will be getting lower pension benefits. It also tends to result in curtailment of current facilities like conveyance allowance, medical insurance or hospitalization benefits. Inflation & falling interest rate might also affect the early retirement plans.
e) Wealth Transfer: - Wealthy individuals must plan how to transfer their wealth to their heirs while paying minimum tax possible.
f) Improved standard of living in retirement: - If the objective of an individual is to live a king’s life after retirement also, than proper planning is must. If they can channelize their income & saving resources properly they are able to do so.
g) Non Economic Objectives: - Some non economic objectives like relocation to the home town, spouse health problem or leading passive life might require different retirement strategies. These problems might lead to additional income or expense which needed to be planned accordingly.
Needs of retirement planning
1) Provide a regular income during retired life: - The most important need of a person is to have a continual source of income after his retirement, which would take care of his needs. It’s very obvious that he would like this income to continue till he is alive, and after his demise to take care of his spouse and his children.
2) Meet lump-sum needs immediately on retirement and thereafter: - Though the first requirement is to have a source of regular income, but then at the same time one wants to be debt free and live a carefree life. One wishes to have money at the time of any unforeseen contingencies. For this it becomes very important to plan for retirement.
3) Take care of inflation: - We had seen that the first requirement would be regular income after retirement. Let us assume that the person gets a regular income of a fixed amount may be sufficient to start with. But inflation can result in increased financial needs over a period of time and the regular fixed income may become insufficient to meet the needs after a period of time. Hence the requirement for an income which would go up with inflation. So the effect of inflation on the financial needs of the person is needed to take care of.
4) Take care of medical emergencies. One of the major problems associated with the retirement is meeting the cost of medical emergencies. It’s very difficult to meet such emergencies with the fixed regular income. Keeping it in mind one must plan for the retirement. Although it would earmark a bit large amount during the time of earning, but will prove good with the secure future perspective.
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Types of retirement plans:-
1) Defined benefit plans: - It is a kind of plan which specifies the benefits each employee receives at retirement. In most of the plans the benefit is stated as a percentage of pre-retirement salary, which is payable for the remaining life as a regular payment or a lump sum on the date of retirement.
2) Defined contribution plans: - It is also known as money purchase plans. Retirement benefit plans can be structured in such a way that, some part of salary can be set aside every month /year either by the employer alone or by the employer and employee together or by employee alone.
Hybrid (DB+DC) plans: - In addition to the above two stated plans there is a third plan too which is combination of both of them and is very rare in nature. In such plans, both the ends i.e. the rate or the amount of contribution to be made to the beneficiary is fixed.You Might Also Like to Read |
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