Retirement planning is very crucial for all individuals. Saving a specific amount of money for retirement is one of the wise financial strategies. A retirement plan is a savings and investment plan that supplements the need for an income after the employee has ceased employment. There are many retirement saving schemes available in the market that offer great benefits and adequate deals. However, there are also some risk factors involved in these that makes an individual hesitant from investing in them.
Pros of retirement saving schemes
Retirement can last up to 30 years or more, and thus having a good amount of money to suffice the need for retirement expenditures is a must. There are many benefits of a retirement savings plan; some of which are discussed as under:
- Long-term savings
Retirement saving plans serve as long-term saving schemes regardless of whether the depositor opts for a lump-sum payment or multiple payments of small amounts. The savings is assured. These plans also create an annuity that can be further invested to give rise to a steady flow of cash post-retirement.
- Option for investment
Not only do these plans serve the need of an income for retirement but the funds can be further used to invest in either the safe government securities or in debt and equity investments depending upon the risk profile. These risks are balanced by the prospects of higher returns.
- Choose how to get paid
The policyholder or the insurer can either invest a lump sum amount and get annuity payments right away or can choose a deferred annuity plan that ultimately lets the corpus earn more interest until the withdrawal.
- Life insurance cover
Investors can get a lump sum amount when they retire or in case of the demise of the individual, whichever occurs earlier, thus, acting as a life insurance cover.
- Negate the effect of inflation
Pension plans for retirements are designed to negate the effect of inflation. Some part of the corpus is offered as a lump sum payment at retirement, and some part is utilized to generate steady cash flow for recurring expenses.
The pension policy and plans can be tweaked to get the lump sum payment on retirement or death of the individual.
Cons of retirement savings plan -
Besides these benefits, there are some drawbacks also. Here are some of the drawbacks of savings plan that one should consider before investing in any of the saving schemes available in the market for retirement:
- Difficulty in anticipating future requirements
It so happens that the payout offered by the retirement policy doesn’t suffice the post-retirement expenses; this problem, to some extent, is unavoidable. To avoid such problems, regular analysis of the market conditions and fluctuations and performance of the policy should be done.
- Limited deduction allowed
Many plans and policies only allow a limited deduction on the tax. The maximum deduction allowed on life insurance premiums under the Income Tax Act, 1961 is Rs. 1.5 Lakh.
- Taxation on annuity
Whenever the investor receives the annuity after the retirement, it becomes taxable as of that date.
- High risks for high returns
Many policies and plans are subject to market fluctuations and have higher risks. To receive higher returns on the amount, people mostly opt for high-risk options whose continuity and steadiness cannot be predicted.
Best saving plan for retirement
The main thing that one should consider is choosing the best saving plan that will supplement the needs and requirements of retirement. Before choosing any scheme, one should properly analyze and study the features of each scheme.
Here are the best saving plans and investment option for people who want a sufficient income for their retirement:
- Atal Pension Yojana (APY)
It is one of the most effective saving schemes initiated by the government, which is specially designed for the welfare of the weaker section. The premiums for this scheme are low, and the benefits are high. Atal Pension Yojana is a robust retirement plan that benefits the weaker section of the society by providing them with regular income. This yojana also benefits those working in the unorganized sector.
- Employee Provident Fund (EPF)
This savings plan was introduced by the Employee Provident Fund Organization (EPFO) and is initiated by the government. The salaried professional must make an equal financial contribution towards the PF account. This saving cum retirement option helps individuals to plan for retirement well in advance. Under this saving scheme, both the employee and the employer make an equal contribution to the account.
- Recurring Deposits (RD)
RD is a term deposit that banks offer in which one can regularly deposit money and get a huge return at the time of maturity. Depositors are allowed to choose the term period and the amount and monthly deposits as per their wish. RDs also allow higher rates of interest for senior citizens and can also be used as collateral for taking loans.
- National Pension Scheme (NPS)
This pension scheme aims at providing security and stability during old age. It was introduced and is managed by the government of India. The money invested is further put in equity and debt funds to generate returns on the investment. The maturity proceeds of this retirement savings plan are not tax-free.
- Pension funds
It is a type of pension scheme that remains in effect for a long period. This scheme offers much better returns upon maturity.
- Deferred annuity
Deferred annuity plans help in accumulating corpus through single huge premiums or regular small premiums over the term of the policy. The pension begins only after the term overs. Under this scheme, no tax is charged on the money invested until withdrawal.
- Immediate annuity
It is one of those types of saving schemes where pension begins right away as soon as the money is deposited. Under the Income Tax Act of 1961, the premiums are exempted from tax. After the demise of the policyholder, the nominee receives the money.
- Senior Citizen Savings Scheme (SCSS)
The senior citizen savings scheme is an ideal option for those retirees looking for less risky products and focusing on minimizing tax. This scheme is available through post offices and certified banks of India and offers its investors secure and regular income. It is an excellent tax saving investment plan.
Senior citizens who are at least 60 years old are eligible for the scheme and individuals between 55 to 0 years of age who have opted for the Voluntary Retirement Scheme, or Superannuation can also invest in this scheme.
The average tenure of this savings plan is 5 years, and it can be extended further for three more years, as per Section 80C of the Indian Income Tax Act, a tax deduction of up to Rs. 1,50,000 can be claimed. Premature withdrawals are also allowed with a penalty.
Factors to consider while buying retirement plans or schemes
Here are some factors one should consider while buying any retirement savings plan:
- Monthly expenses
Monthly expenses are one of the main factors to consider before and while purchasing any saving schemes. One should keep up with the regular monthly expenses of the family. It is crucial to create a financial corpus to take care of these expenses. One should analyze the monthly expenditure required and then plan to invest in retirement plans and policies.
One should keep in mind the growing rate of inflation and thus plan accordingly the amount that would suffice the need for retirement.
- Life expectancy
Although there is no way to predict life expectancy, one should have a rough idea of how much retirement may take. The retirement funds calculated should be sufficient enough to support the old age financial needs.
- Medical expenses
When one gets old, they become more vulnerable to catch unexpected or unpredicted illnesses. Thus, the retirement plan or the pension plan must provide adequate funds to deal with such types of medical uncertainties.
- Assets and loans
It is crucial to consider the loan and current assets while purchasing retirement plans. If any individual has loans and he/she fails to repay them off, it may then take a big part of the annuity income.
- Knowledge of retirement planning options
One should do a proper analysis of the factors mentioned above like, the monthly expenditure, medical expenses, loans & assets, life expectancy, etc., and then choose the best saving plan. There are several options available in the market, while one should select only the most suitable ones.
The retirement savings plan is supposed to be for retirees who aren’t high-risk tolerance and, thus, the pension funds are most likely to be invested in monetary devices that are mostly low-risk. These savings plans should aid the demand of the money required in the golden years of life. Hence, choosing the best saving plan becomes crucial to living a stress-free life with a good income source.