Pension planning presents a methodology by which people, mostly those nearing their retirement age, manage their financial resources to ensure a regular income stream after retirement. This article will break down what pension planning is, the options that exist, how to go about it, and a few common FAQs.
What is Pension Planning?
A Pension is a retirement plan through which a worker receives regular payments from their employer or from a fund into which they have contributed over their working years. While most people wait until they’re approaching retirement to start considering pension planning, the best approach is to start as early as possible. The main concept is to accumulate money gradually over your employment period to have a substantial amount saved up when you retire so you can maintain your regular standard of living.
Types of Pension Plans
Pension plans are essentially categorized into two types: defined benefit plans, and defined contribution plans.
Defined Benefit Plans:
These are referred to as traditional pension plans. In this arrangement, the employer guarantees that the employee receives a definite amount of benefit upon retirement, irrespective of the performance of the underlying investment pool. The employer carries the risk of investing the pension plan’s assets and for ensuring sufficient funds are available to provide the promised benefits.
Defined Contribution Plans:
Under defined contribution plans, the employer makes a certain contribution into the member’s account each financial year. The final benefit received by the member depends upon the contributions made and the investment returns earned on those contributions. The risk of the investment is borne by the employee, not the employer.
Pension Planning Process
Pension planning should be seen as a thorough process rather than an afterthought. Consider these steps to guide you on your pension planning journey.
1. Assessment of Future Expenses
The first step towards pension planning involves a detailed survey of the expenses that you anticipate to have during your retirement. You may have to envisage the lifestyle you would like to have in your retirement years and plan accordingly.
2. Calculation of Required Retirement Corpus
It is also essential to compute the retirement corpus required based on your future expenses, present income, inflation rate, and years left for retirement. Today, there are several online calculators available to make this task easy.
3. Investment in Pension Plans
Next, you should evaluate different pension plans available in the market, their terms, benefits, and choose the one that fits your retirement needs and goals the most.
4. Regular Review of Pension Plan
It is also important to review your pension plan regularly to account for changes in income, lifestyle, or goals. You may have to increase contributions or change the plan itself if necessary.
Conclusion
Retirement might seem far off, particularly for those in the early stages of their careers, but it’s never too early to start pension planning. The earlier it begins, the less of a burden it will be, and the more comfortable retirement you’re likely to enjoy. Remember, it is not about how much money you earn but how much you save and grow that matters.
FAQ
1. When should I start planning for a pension plan?
It’s never too early to start planning for a pension. In fact, the earlier you start, the longer your money will have time to grow. Even if you start with small investments, it will still add up over the years due to the magic of compounding.
2. What is a good amount to have in a pension?
The amount required in a pension plan varies from individual to individual based on their retirement needs, current lifestyle, and desired standard of life post-retirement. Use a retirement calculator to estimate your personalised retirement corpus.
3. Can I lose my pension if the company goes under?
If your employer offers a federally insured pension plan, then in most cases, you’re protected by the Pension Benefit Guaranty Corporation (PBGC). However, if your company goes bankrupt, your pension could be at risk.
4. What happens to my pension when I die?
What happens to your pension when you die largely depends on the type of pension scheme. Some pensions can be passed onto your spouse or registered civil partner upon your death. Others may have a guaranteed period, typically five or ten years, and will continue to be paid for this term to your beneficiaries regardless of when you die.
5. Should I rely only on a pension plan for my retirement?
While a pension plan is an excellent start towards securing your retirement, you should ideally have multiple streams of income and investments for a financially secure retirement. This could include personal savings, investments in stocks and other assets, and other retirement savings accounts.
