Thursday, May 21, 2015

Retirement Planning: Sooner the Better

Retirement Planning is a crucial aspect of everyone’s financial security. As you age, your financial commitments towards the family, employability, and healthcare needs change, with time. On retirement,this can impose a financial burden on you and your family members. To prevent such a situation, investing in a retirement scheme now, would be a prudent decision. Retirement Planning creates adequate security that helpsyou stay financially independent with the ability to sustain your lifestyle.

Despite the necessity for retirement planning,it is not given adequate importance. According to the National Institute of Retirement Security (NIRS), the average working household in the US has negligible or no savings. The median Retirement Account balance is USD 3000 for younger, working-age households and USD 12000 for near-retirement, working-age households (source: This can expose a person to severe financial risk after retirement. 

There are several employer-sponsored and Social Security-based Retirement Plans that you can subscribe to and mitigate the risk. 

Types of Retirement Plans
  • Defined contribution plans
  • Defined benefit plans
  • Hybrid and cash balance plans
  • Qualified retirement plans
  • Individual Retirement Account
  • HR10 Plans
  • Nonqualified Plans
Factors to consider while choosing a Retirement Plan
  • Age and Income profile: Working individuals in the 20-40 years age-group can afford to choose retirement plans or financial instruments that present a higher investment risk but offer more returns. However, those in the 40-60 years age-group would be better off, to follow more conservative plans that are low-risk, low-return.
  • Allocating Assets: Younger individuals and those with higher incomes tend to allocate a portion of their investment towards retirement plans that are low-risk, low-return and the balance towards high-risk, high-return instruments that generate wealth. However, older individuals and those with modest incomes must ensure that a larger portion of their savings is invested in the first category, and a much smaller portion in the second category.
  • Asset Types: There are several options available for investment, with Bonds, Mutual Funds, and stocks, being the most popular. Apportioning the right amount into each of these investment portfolios, depends on other factors as listed below.
  • Risk appetite: An individual’s appetite for risk depends on his/her age, income, ability to find part/full-time employment post retirement, fixed and liquid assets, and ability to raise capital from friends and family in times of need. Individuals with a higher risk appetite have more flexibility while considering the right retirement plan for them.
  • Debt Management: Loans availed at lower interest rates may not have much impact on the choice of retirement plans. However, all high-rate loans and debts must be cleared at the earliest in order to choose the right retirement plan. This may require more financial discipline and compromises to your lifestyle.
  • Mortgage Payments: Mortgages occupy a significant portion of monthly payouts. It’s best to clear all mortgages when one is still a few years away from retirement. This will free up a large part of the monthly income that can be invested in retirement plans.
  • Retirement Benefits: Most employees of government agencies and private companies receive several benefits upon retirement. This amount can also be invested in retirement plans to ensure higher returns over time.
  • Lifestyle related expenses: Depending on your social standing and hobbies, your expenses after retirement can be significant, and these must be factored in, while choosing the right retirement plan.
  • Taxation: In the years,soon after retirement, one must withdraw more from taxable instruments and less from tax-free instruments to ensure a longer life for theretirement plan.
Retirement Planning is intricate and involves several categories of plans, instruments for investment, and terms and conditions that apply on each transaction. You must also factor in inflation, the flexibility to contribute/withdraw funds at random, andfines or penalties that are applicable on deviations. 

Seek the assistance of Insurance Companies or Investment Consultants, who will be able to guide you, in choosing the right retirement plan, that is best suited to your needs, pre and post retirement. 

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