Retirement Plan or Plan for Retirement ….Think over it

Recently , a small get together of old buddies thrown a serious concern on their retirement understanding  . Being an investment advisor , i was bombarded with number of questions like 

I have taken this pension plan 

Which retirement plan should i buy 

Which is the best retirement plan in the market 

Insurance companies have successfully able to capture these concerns through their punchlines , their advertisements ( the best one – Sir Utha Ke Jiyo ) and pulled the investors to invest into such pension policies . It is an excellent emotional trap for today’s young investors . 

No doubt , Investing for retirement is very important in today’s life due to change in lifestyle , no support of pension due to private jobs, costly medical expenses,  nuclear families concept etc .

Generally, people earn between 25 to 55 years of age. Now, one has to consider the living after 55 till 80-85 yrs seriously due to increasing living expectancy ratio. It is like working for 30 yrs and then taking care of next 30 yrs from those assets which are created during earning(accumulation) phase. It is popularly called as Rule of 30 : 30

Today’s Rs 30,000-/ monthly expenses will shoot up closely to Rs 3 Lakhs in 30 years with an inflation@ 8 % p.a. . Remember , it is just the basic requirement . One has to replace his car , household appliances at least 2-3 times in his/her retirement life .  Therefore , choosing the right asset class and mix is very important .

Why you shouldn’t go for retirement/pension plan 

In a pension plans , you have an accumulation period in which you keep contributing it through premiums and then vesting age , the age from where you would like to receive the annuity /pension either monthly or quarterly or annually . 

However ,

  1. Tax-inefficient :The yearly payout known as annuity is taxable at the hands of investor. 
  2. Low Annuity Rate : Once your annuity rate is fixed , then you can not change your annuity provider even if you know the bank/insurance company opposite to your house offers higher interest rate or annuity rate. 
  3. Rigidity : It is One way. once you enter in it , there is no way out . There is no provision of surrendering the policy. You can not change the annuity option once selected.
  4. Cost : The expense structure is very complex and costly ,which impacts the yield over a period of time .

One should holistically plan for retirement by proper financial planning and asset allocation. 

The simplest and easiest way to plan for retirement is to accumulate the corpus through Systematic Investment Plan (SIP) ( Regular Investment ) and then consume it through Systematic Withdrawal Plan ( SWP ) ( Regular Withdrawal )

After all “Retirement is when you do what you want , not what you must”.