Retirement is the time to take the most important life decisions like estate planning, deciding about the pension plan, investing life savings, etc. However, one shouldn’t wait for retirement to take these crucial imperatives. One needs to plan one’s retirement early to enjoy its benefits at a later stage.
He further adds, “Ergo, it is highly recommended to start comprehensive financial planning in their late 20’s or early 40’s to reap the benefits of compounding.”
Hence, retired life is that period of your life where you should have the best plan possible. Experts say the initial planning requires a detailed understanding of factors, such as:
How do Pension plans benefit during retirement?
Most retired people prefer risk-free life therefore they search for investment opportunities that entail an extremely low degree of risk.
However, Agarwal says “this is an attractive investment strategy for the retiree but the rate of Real Return is low or could also be low or negative at the time of retirement considering the Inflation Rate since Nominal-Inflation is equivalent to the Real Rate of Return. The need for tax implications to be evaluated is a must before pursuing any investment of your hard-earned money. Therefore, certain Pension Plans and Mutual Funds become a wise alternative to receive regular income.”
Pension plans are a combination of Insurance Plans with Annuity. Industry experts say the ideal way of investing in it is to start investing in the late 20s wherein the premium is relatively low comparing it with later years of age.
Note that, these plans come with negligible risk but the return is also extremely low if we compare it with other investment instruments. Net return can only be evaluated after analysing the tax implication on the Real Rate of Return of investment. The returns are usually tax-free. Most of these plans are offered by LIC Life Insurance, ICICI Prudential Life Insurance, HDFC Life Insurance, etc.
Variations of Annuity plans;
∙ Immediate Annuity: With this plan, a single premium is paid in a lump sum and not multiple numbers of times. An individual will receive a guaranteed payout at a regular interval of time. Agarwal adds, “It should be bought by those individuals who are on the verge of retirement and are expecting to receive regular income every month with immediate effect.”
∙ Deferred Annuity: Another plan wherein you start investing for a particular period at an early age to build an investment corpus and receive a regular income after a gap of a chosen interval.
∙ Fixed Annuity: With the fixed annuity, the annuity payout will be the same throughout the time frame of the payment. Resources are generally invested into fixed-income instruments. Thus, there is a minuscule development of the composite sum contributed over the accumulation period of the annuity plan. Agarwal says, “It is ideal as a benefits payout because this framework ensures income to the individuals in the after retirement period.”
∙ Variable Annuity: Unlike the aforementioned annuity plans, these are Equity-linked and could deliver good returns if the Equity Markets perform well. Experts say it is an ideal choice for young investors as markets tend to do well for long periods. Note that these plans are riskier therefore must be chosen carefully.
∙ Lump-sum Annuity: Annuity provides regular payouts after a stipulated period; however investors also have an alternative to provide the payout in a lump sum. It must be understood that the lump sum payout is an alternative and is accessible only at a specified period.
