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POST RETIREMENT
Retirement is a stage in life where you need a steady income to support yourself and your spouse, while maintaining the desired standard of living. When planning for retirement, a moot question stares at us - how much is enough?
Though we can draw up a plan that includes future cash flows, accumulation and spending assumptions, it is not always possible to accurately assess this amount, especially as there are other variables like expected rate of returns, inflation and taxes that also need to be considered.
There may be constraints in saving the desired amount of money on a regular basis for retirement. Hence, it is possible that you may not entirely be able to depend on the returns from your investments. Creating alternative income sources, hence, is a must.
There are usually three income sources during retirement
Unless one creates a sufficiently large corpus, it is difficult to survive on a single source. Most retired persons depend on at least two of the three sources. Let us look at each such source in more detail.
RETIREMENT PLANS:
Employer Sponsored - There are many ways an employer can set up and sponsor retirement plans and accounts for its employees. These plans can be broadly divided into defined benefit and defined contribution plans.
Defined benefits plans are those which offer the employee a fixed pre-determined amount, linked to the salary. This is generally paid as a monthly income for life, with a certain portion allowed to be commuted or received as a lump sum. For instance, the employer cuts a defined portion of annual salary to provide assured pension.
In defined contribution plans employees do not get a guaranteed income payout on retirement. The regular contribution is invested in various permissible instruments. The returns of these investments determine the retirement benefits.
Such plans are funded through employer-employee contributions. Increasingly, pension schemes are moving towards this system, creating more uncertainty for a person planning his retirement.
There are other employer sponsored retirement benefits too, such as gratuity and voluntary retirement schemes.
Self-Created - The most common and popular scheme in this category is the public provident fund (PPF). Besides this, other popular avenues include insurance companies' retirement plans, which provide pension plans and annuities.
RETURNS FROM INVESTMENTS
Apart from the retirement plans and accounts mentioned above, an individual would need to make separate personal investments to plan for their retirement
A few popular investment avenues are: