Is your pension plan retiring before you?
A good pension plan will keep you financially stable in later years
First, the basics: While pension is payment made in the form of deferred compensation to the employee, a pension plan is a design that accumulates cash through various mechanisms and can be drawn upon at retirement.
Today, the average Indian relies on savings for an average of 20 years after retirement-for various reasons, not everyone can depend on occupational or employer’s pension.
Also, we may not realise how unforeseen expenses can adversely affect our goals. In this scenario, few investments are as important as a retirement plan. And the right time to shop for a pension plan is no later-even an 18 year-old can buy a plan.
Companies like LIC, HDFC Standard Life, Tata AIG, Reliance Life, ICICI Prudential, Om Kotak Mahindra, SBI Life and Aviva Life Insurance offer pension plans (see box) for a minimum tenure of five years. Monthly, quarterly, half-yearly, or annually, you can contribute funds that can be accumulated for as long as 52 years. The entry age for all plans is 18 years; unfortunately, the lock-in period is 65 years for most of them. While you can’t withdraw before you are 45, you can keep investing as late as 79.
How much you invest depends on how much you think you will need upon retirement and what your needs are like. However, a good rule of thumb would be to plan on needing at least 70 per cent of what you live on prior to retirement. For easy calculation, let us say you need Rs 1 lakh per year today. When you retire, you would need at least Rs 70,000 in annual income.
What sum would give you an income of Rs 70,000 per year? One of the simplest formulas is calculation for an annuity in perpetuity. Simply, it is the sum you need divided by the return you feel your funds can generate when you retire. For a low-risk, conservative portfolio, you might generate 6 per cent every year.
The formula would be Rs 70,000/.06 = Rs 11,66,667. To generate Rs 70,000 at this rate, without spending your principal amount, you would need to have Rs 11.66 lakh when you retire.If you had a return of 8 per cent, to generate the same income you would need Rs 70,000/.08 = Rs 8.75 lakh. If you don’t have that much saved up, you could spend down your principal. As an example, say you had saved Rs 5 lakh and could earn 8 per cent on the portfolio, the portfolio would produce an income of Rs 40,000 per year with no spending of principal.
To get to Rs 70,000 per year, you would spend an additional Rs 30,000 out of principal. The next year you would have only Rs 4.7 lakh to generate income and would deplete your savings in 12 years. That’s bad news, as the average person who turns 65 in the India this year will live at least another 20 years.
INFLATION AND ITS IMPLICATIONS
Apart from taxes, another thing that’s certain is inflation-an increase in cost of living caused by the economy. It erodes your purchasing power in retirement, as you have to pay more money to receive the same goods and services. Recently, inflation has severely hit things retirees consume the most-healthcare facilities and medicines. Preparation is most effective when it is done early. Yet most people underestimate their future financial needs. So choose your course of life now.
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Source : http://www.harmonyindia.org/hportal/VirtualPageView.jsp?page_id=2933