Category Archives: Retirement Planning

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Insights of National Pension System or New Pension System.

Category : Home , Retirement Planning

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 New Pension System or The National Pension System is a

pre defined contribution pension system which is operated by the government of India. Before2004, NPS used the defined benefit plan, wherein the benefits available to the pensioner post retirement were pre-defined.

Apart from offering a range of investment options to employees, the scheme allows individuals to make decisions about where their pension fund is invested, permits limited withdrawal prior to retirement and reduces the total pension liabilities of the Government of India.

NPS has two main categories:
Tier I :-

A Tier I account is a basic retirement pension account available to all citizens from 1 May 2009. Although in case of Premature Withdrawal, one can withdraw only up to 25% after a lock-in period of 10 years and the remaining has to be invested in an Annuity.
It has a minimum contribution of Rs. 6,000 per annum or Rs. 500 per month. Although it has no maximum investment limit, one can get a Tax Exemption of up to Rs. 1.5 Lac per annum as per section 80C and an additional Rs. 50,000 as per section 80CCD (1b).
Post attaining the age of 60, maximum 60% amount can be withdrawn and remaining, 40%, needs to be invested in Annuity.
Tier II :-

A Tier II account is a Prospective Payment System (PPS) account that permits some withdrawal of pension prior to retirement under exceptional circumstances, usually related to the provision of health care.
It has a minimum contribution of Rs. 2,000 per annum and no maximum contribution limit. However one does not get any tax benefit under this category.
There is no locking period given and there are no Tax Benefits as well.

Tax benefits on NPS are available through 3 sections – 80CCD(1), 80CCD(2) and 80CCD(1b).

All the tax benefits, annuity restrictions, exit and withdrawal rules are applicable to NPS Tier-I account only. NPS Tier-II account is like open-ended ended mutual fund. You can take out the money at any time without any hassle and tax burden due to non availability of tax exemption.

Benefits of NPS (Tier I)
NPS has 2 major benefits such as
Tax Benefit upto 1.5 Lac under section 80C and Rs. 50,000 under section 80CCD (1b).

The returns earned from this scheme is better than various other tax saving products in case of Auto Choice. In case of Active Choice, the composition of the portfolio matters.Besides these 2 factors, it instills a practice of regularly saving for retirement.

Risks of NPS (Tier I)
NPS has certain risks involved as well, such as :

Once a person has started investing in an NPS, he has to make the minimum contributions every year and can withdraw only 25% after 10 years for specific purposes including children’s higher education or marriage, construction or purchase of first house and medical treatment of self, spouse, children or dependent parents.
There is a minimum contribution of Rs. 6,000 per annum and only maximum of 50% can be allocated to equities.

As of now NPS is EET (Exempt, Exempt, Taxed) which implies that the investment and returns won’t be taxed but the redemption amount would be taxed as per the eligible tax slab.

Taxation:

In Budget 2016-17, the government rationalized the tax on NPS to make it more attractive. NPS has EET status which means that the investment and returns are not taxable, however a tax will be levy on the redemption amount.Since minimum 40% of the corpus has to be invested to buy an annuity, the taxation on the 40% of the corpus get delayed. In addition, now a person can withdraw up to 40% of the corpus without paying any tax. Therefore, only 20% of the corpus will be taxed.
Let’s take an Example:

Let’s say someone has an NPS corpus of Rs. 1 crore at retirement. The following two this will happen to him:

He has to buy an annuity of the 40% of the corpus i.e. Rs. 40 Lac goes to annuity.

He can withdrawal the rest Rs 60 lakh of the corpus, out of which Rs. 40 lakh is tax free while Rs 20 lakh is taxable as per the income slab of the investor.

Backdrops of NPS:

This becomes quite painful for those who would retire with NPS due to taxation on the balance amount to be withdrawn as per normal income tax slab.Also the returns earned from Immediate annuity is quite lower as compared to other fixed nature instruments.

Further, the income generated from annuities is also taxable.

Conclusions:GOI is making no stones unturned to make NPS a great hit by all means and also its continuous approach towards zero pension liabilities. Also they are contemplating to increase the equity exposure upto 75% for active choice options. But the compulsory annuity purchase of minimum 40% and additional tax burden on the @20% of total accumulated balance if not invested in annuities is giving investors a second thought about this.

“Happy Reading”

 

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What is Retirement Planning?

Category : Home , Retirement Planning

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Retirement Planning:

In a very simple way we can explain that the plans and executions to secure the post retirement life or to maintain the same standard of living after retirement are the part of retirement planning.Retirement planning is neither  a T-20 match nor a 50 overs one day cricket match.It’s like a 5 day cricket test match.Where one’s patience,hard works,disciplined techniques are measured.And the ones who follow all these technical glitches are called a successful cricketer and in finance parlance a planned investor.An aggressive planning for investment or investment made in hurried way without thinking for other financial aspects can land a person no where.Therefore, a patient and disciplined approach of investment is the main key for retirement planning.

One must know that retirement planning is not a goal,rather this is a systematic  approach which would sail through the working years and end up at the retirement period.

We, the Indians are educated enough but not to that extent to differentiate between “savings” and “investments”. Often, we confuse ourselves between these two aspects.Letting your money keeping idle in bank accounts can be termed as savings.On the other hand, letting your money grow and earning an income over inflation can be termed as investments.Obviously, this is completely our own point of views and others may differ.

We have seen many of our friends telling us that they have made some investments very prudentially by investing in few LIC policies of their own choice.In India 50% of the educated people may be more than that keep saying buying some LIC policies as investment.They don’t consider this as insurance coverage and rather they are very much delighted with this investment.This is completely wrong.Many of the traditional life insurance policies fail to deliver an inflation beating return and still we keep on saying this is our primary investment.

Buying traditional life insurance policies ought to be perceived as taking insurance coverage against the life of the insured person in the event of unforeseen contingencies.On the contrary, keeping your money in various fixed or variable return providing instruments are called investments viz; putting money in Fixed Deposits,buying NSCs,Mutual funds and etc.

Therefore, buying some costly traditional life insurance policies should not be construed as investment for sun set years.Rather, we must set up some needs or estimations keeping in mind the current income status,lifestyle,financial burden,qualifications,inflationary condition,period of retirement, obviously realistically.Then we must focus on the avenues where one should park his investments that can deliver an inflation beating return to reach the preconceived retirement kitty.Also, there are many other aspects to be kept in mind when planning for one’s retirement.This discussion has been kept very simple for everyone’s easy understanding.We should also ask ourselves whether still we are confused between savings and investments.

                                            ” Happy Reading”

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Retirement need estimation

Category : Retirement Planning

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How much money do you need when you retire after certain times and want to maintain the same standard of living.In my earlier topic I discussed about how much important is to save for post retirement to sustain for at least 15 to 20 years after retirement.Here, I will discuss regarding the annual expenditure that you will require when you retire.

Now, let’s take a very simple example.

Mr. Adityanath  is  32 years old.His current annual expenditure is ₹.4,80,000/-.He will retire at the age of 60. His annual expenses is expected to rise by 7% every year.Also, he wishes to maintain the same standard of living post retirement.Now, what will be his annual expenses after retirement i.e. after 28 years from now.

Let’s summarize all the information provided above.
Particulars
Figures
Present expenses per year ₹.4,80,000.
Current age(Years) 32
Retirement age(Years) 60
Years to retire from now 28
Annual Inflation rate(%) 7%

Therefore, we need to calculate the annual family expenses after 28 years when Mr. Adityanath retires at the age of 60.

A
B
Rate 7%
Nper 28
pmt 0
PV ₹-4,80,000.
FV ₹3,191,442.41

Therefore, we can see that the current annual expenses of ₹4,80,000/- will turn into ₹31,91,442/- in just 28 years with inflation rate of 7%.And if the actual inflation rate jumps to 8% then the annual expenses will also jump to ₹41,41,011/-.This is quite unbelievable that for just for 1% increase in the inflation rate the future annual expenses is going up by ₹9,00,000/-.

Are we really prepare for this?This is not a mere calculation rather it is a fact.One very important thing also I would like to add here is that no one really wants to maintain the same standards of living rather everyone wants to upgrade it with the passing times.Living standards tend to increase along with the increase of earnings and also along with times.

So, you need to save for your future in such a way that it may fetch you an annual income of at least ₹41 Lakh. Generally speaking it might look very difficult when you look at it. But it is actually easy if one starts early and make smart decisions.Contribute as much as you can from the very beginning to your retirement portfolio.Most, importantly you have shift your fascinations from fixed income instruments to equity related products.This smart choice can reach you to that hefty corpus that you may need after retirement.

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Retirement Planning – Are you going to retire soon?

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Retirement planning is not just a one night process.This is a systematic plan or process which is to be executed meticulously throughout one’s entire working life.Many a times in the past it has been seen that a person earns a hefty amount but without proper planning and ignorance towards unforeseen future events has to adjust or compromise with one’s financial liabilities to a great extent during his sunset period.Considering today’s fast paced lifestyle it has become mandatory for everyone to lay down a proper plan towards retirement.A well laid out plan not only helps in maintaining the same standard of living but also it helps one out in enjoying the sunset life with the loved and dear ones more strongly.Even a sailor of a boat supposed to know the goal or destination where he will have to reach and even the retirement planning is also very alike.Since, planning for retirement generally takes 25 to 30 years ,one should not take this very likely.Everyone should maintain the sanctity and must be disciplined enough to accomplish the set out goals without keeping any stones unturned.

Now the question arises before us is how to plan for retirement.Where to start it from?I must point out here that it is very simple since this is not a rocket science.We must bear in mind that only the holistic approach towards this planning is going to help us in accomplishing our goals and not the halfhearted one.The main principle of planning for retirement is based on three questions viz; how much to save,how to save, and where to save.

Firstly, we should be very clear about our present standards of living.Also, it does not mean that a person’s standards remain same during his entire life span.I am just trying to focus mainly on the present standards of living from which we can go up only and no chance of being dragged.That means we need to chalk out how much wealth we need to accumulate in various ways so that we can maintain at least the same livelihood after our retirement.Not to be very much worried for this section since now a days there are various methods available in the market through which we can determine the inflation adjusted wealth or retirement corpus.We must consider the impact of inflation here.Inflation basically reduces the purchasing power of money.Thus, the very first part is need estimation.

Secondly,we have to find our our income status or level.How much amount we need to keep aside monthly for investments or if there is any shortfall, from where we can manage it or what are the avenues where we need to curtail our present expenses.Remember, I already mentioned above that only the holistic approach towards this planning can help us in reaching our goals.Sacrifice now to reap the benefits in future.Here, I would like to mention the famous quote of none other than Sir Warren Buffet that “Income minus Savings= Expenditure”. Spend only that amount which is left after savings.

Thirdly, the most important part is we must determine the investment avenues or areas where we need to put in our savings so that we can accumulate our retirement corpus such as Mutual Funds,Stocks and Bonds,Fixed Deposits,Recurring Deposits,Life Insurances and many more.Why I consider this section most important is because only this decision or selection would determine the actual fate of our planning. I mean the success of planning for retirement solely depends on the investment areas which may sail us towards our mission easily.

So, if any one is going to retire very soon must ask oneself ” Have I done justice to my family,to my earnings of my entire life?” Is my corpus sufficient to bring me a handful earnings for the next 20 years smoothly?Or, I may have to make some adjustments or compromise with some of my past dreams which were to be executed post retirements.

 

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