Why Pension Plans Are Not The Best Retirement Plans
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Why Pension Plans Are Not The Best Retirement Plans
A HAPPY looking 60-something Dadaji playing badminton (having Chyawanprash before and after the game) with his grandson. Nana Nani frolicking on the beach in floral print shirt. You get the picture...
These are, usually, the vignettes of happy retired seniors as seen on the brochures of pension plans. Yet, most people fear retirement for more reasons than one.
The most nagging thought is figuring out if you have the dough to indulge in travelling abroad or at least live like you used to. These are genuine concerns. It is at this stage, when you are 45 years, that you buy pension plans to see you through retirement. However, in most cases, it may be too little too late. At this stage committing even large sums of money is of limited help.
For instance: If the target amount is Rs1.5 crore at retirement, the amount to be committed per month (assuming 8 per cent return throughout the period) for someone who wants to invest for 30 years is Rs 10,065 per month. For someone who has only 15 years to go, it is Rs 43,348 per month.
So, starting early is important for a well-funded retirement. Alright, how about investing in a pension fund at an early stage?
Pension fund - Not a good idea!
Pension plans may not be the best vehicles, from tax point of view. Consider the following:
- If you want to withdraw the accumulation before vesting, the entire amount is taxable.
- Just before vesting, you can only take out up to one-third without tax incidence. The remaining will be used for paying annuity.
- After annuity starts, you cannot access the funds at all.
- Annuities from these plans are taxable as income
So, where should I invest?
Pension plans are not the only way forward for planning retirement.
1. Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt over time. You can start with upto 75 per cent in growth instruments and can slowly scale it down over time to bring it to between 40 and 50 per cent at retirement, as per needs and you risk-bearing ability.
2. Property may be a good idea at retirement, as it can give a consistent rental income
3. If you start early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. So, don’t just stick to PPF and NSC, look beyond. Early starters need not worry about market volatility. They can weather the storm as they are long-term investors
4. Retirement period spans decades. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity and MFs. Since retirement period itself is long, these instruments will have time to perform.
Points to keep in mind
Investing is not all. There are some points that you cannot ignore:
1. Take medical cover early on and make sure the policy continues into retirement.
2. Do not access the funds earmarked for retirement for any other need.
3. Invest carefully after considering the risk/return. Don't invest in everything that comes your way.
4. Don't play it too safe. If you do, your corpus may not grow enough to meet your needs at retirement.
5 . Keep shuffling your investments. However, if they are good investments, stick with them.
Good retirement planning needs just common sense. Once that is ensured, you could frolic on the beach or play badminton with your grandson. And look like a million bucks, at 60.
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Why Pension Plans Are Not The Best Retirement Plans
A HAPPY looking 60-something Dadaji playing badminton (having Chyawanprash before and after the game) with his grandson. Nana Nani frolicking on the beach in floral print shirt. You get the picture...
These are, usually, the vignettes of happy retired seniors as seen on the brochures of pension plans. Yet, most people fear retirement for more reasons than one.
The most nagging thought is figuring out if you have the dough to indulge in travelling abroad or at least live like you used to. These are genuine concerns. It is at this stage, when you are 45 years, that you buy pension plans to see you through retirement. However, in most cases, it may be too little too late. At this stage committing even large sums of money is of limited help.
For instance: If the target amount is Rs1.5 crore at retirement, the amount to be committed per month (assuming 8 per cent return throughout the period) for someone who wants to invest for 30 years is Rs 10,065 per month. For someone who has only 15 years to go, it is Rs 43,348 per month.
So, starting early is important for a well-funded retirement. Alright, how about investing in a pension fund at an early stage?
Pension fund - Not a good idea!
Pension plans may not be the best vehicles, from tax point of view. Consider the following:
- If you want to withdraw the accumulation before vesting, the entire amount is taxable.
- Just before vesting, you can only take out up to one-third without tax incidence. The remaining will be used for paying annuity.
- After annuity starts, you cannot access the funds at all.
- Annuities from these plans are taxable as income
So, where should I invest?
Pension plans are not the only way forward for planning retirement.
1. Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt over time. You can start with upto 75 per cent in growth instruments and can slowly scale it down over time to bring it to between 40 and 50 per cent at retirement, as per needs and you risk-bearing ability.
2. Property may be a good idea at retirement, as it can give a consistent rental income
3. If you start early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. So, don’t just stick to PPF and NSC, look beyond. Early starters need not worry about market volatility. They can weather the storm as they are long-term investors
4. Retirement period spans decades. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity and MFs. Since retirement period itself is long, these instruments will have time to perform.
Points to keep in mind
Investing is not all. There are some points that you cannot ignore:
1. Take medical cover early on and make sure the policy continues into retirement.
2. Do not access the funds earmarked for retirement for any other need.
3. Invest carefully after considering the risk/return. Don't invest in everything that comes your way.
4. Don't play it too safe. If you do, your corpus may not grow enough to meet your needs at retirement.
5 . Keep shuffling your investments. However, if they are good investments, stick with them.
Good retirement planning needs just common sense. Once that is ensured, you could frolic on the beach or play badminton with your grandson. And look like a million bucks, at 60.
= = = = = = = = = =
