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How to choose a Pension Plan for Retirement Planning

Retirement planning is a critical financial responsibility that every individual owes to himself and his loved ones. Those who ignore it will have much to regret when they outlive the bank’s money supply. With an increase in life expectancy and an escalating cost of living and healthcare, retirement planning must be taken up as a priority.

Here are 10 tips for buying a retirement plan.

1. Earlier is better.

Retirement planning must begin early on. How early? Right from the time you draw your first cheque, set aside some money for a rainy day. Over time, as your salary/income increases, hike the contributions.

2. Equities are important.

Studies have proved that over time, equities can add significant value to the portfolio compared to other assets like fixed deposits, bonds, gold, and property. So, when it comes to retirement planning, make sure you include equities. This could be in the form of unit-linked pension plans, equity funds, or stocks.

3. Think diversification.

Equities are good, but so are fixed deposits, bonds, and gold. Wait, aren’t we contradicting the previous point where we said equities work harder than other assets? True, but that is not to say equity will solve all your problems. You need a portfolio with equities in it along with other assets like fixed deposits and gold. All these assets need to be in a particular weightage or allocation. Together, they form a portfolio that can help you achieve your post-retirement aspirations.

4. Even if PPF is enough.

Many individuals go into retirement planning with an autopilot mindset. They contribute money towards options like PPF (public provident fund) or EPF (employee’s provident fund) and believe they are set to retire in comfort. This is far from the truth. These options are at best one of the avenues we discussed earlier (remember equities, fixed deposits, bonds, and gold). There is more to be done in terms of building a portfolio than just PPF. PPF or EPF won’t even be enough to fight inflation. Picture this: if long-term inflation is at 6% and the PPF rate is at 8.5%, that’s a mere 2.5% (8.5%-6.0%) net of inflation. Imagine you go into PPF thinking you will make Rs 85 on every Rs 1,000 and you end up making Rs 25 on every Rs 1,000 because inflation stole the rest of the money from you.

5. Vesting age.

Go for a pension plan with a vesting age that matches your needs. There are some pension plans with a vesting age starting at 40 years old. So if you want an income stream that early in life, go for such a plan. On the other hand, there are plans with a vesting age of 85 years, which is suitable if you plan to retire late.

6. Higher sum assured.

Go for a pension plan that gives out the higher sum assured on vesting and accrued bonuses or an assured benefit.

7. Guaranteed death benefit.

Prefer a plan with a minimum payment on death, e.g., 100% of the reimbursement of premiums.

8. A suitable annuity option.

For example, opts for a pension plan with the annuity options most suited to you. For example, the lifetime option guarantees an annuity for a certain number of years regardless of whether the policyholder survives or not. The joint-life/last survivor annuity gives out a pension till the individual is alive, post which his spouse receives the pension.

9. Expenses Go for options where charges or expenses are competitive.

Remember, the more money you lose towards expenses, the less you save towards retirement. This calls for a comparison of expenses across options to identify the most cost-effective one.

10. Financial planner Retirement planning is a serious business.

It is serious enough for you to commit money towards it. And it is serious enough for you to consider engaging an experienced and competent financial planner who can handhold you through the retirement planning and execution process.



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