16 December 2010

Introduction to Retirement Pension Planning

The sad thing about most people getting a retirement pension today is that it just isn't enough to cover basic needs. Enjoying the same lifestyle before and after retirement is something that is more of a dream now, rather than the reality it should be. After all, that's what pensions are about - to provide for people who have worked hard all their lives.

Despite the bad state of the economy and inflation and decreasing benefits, retirees can still make ends meet. It might even be possible to add to the employer or state pension with a growing nest egg. But it calls for some very smart retirement planning and a diversified portfolio of investments.

Here's a few clues on how to get started. These tips may vary based on the country, but for the most part, it is general advice and rules that have proven to work. Nothing works better than early planning, and the first thing that needs to be done is to figure out how much money is required.

As a general rule, multiplying the income level by 25 gives the amount of money required at age 65 to provide the same lifestyle. Contributions to a pension fund should be made with this amount in mind, but don't get too worked up if it's not possible. There are other ways to bridge shortfalls.

There are two things that can be combined to create a growing nest egg. One is taking an early retirement, so that the pension funds are accessible. Second thing to do is not to avail of the monthly pension right away. Instead, take a part of the full amount (typically around 25%) and use this amount to create a diversified investment portfolio.

Such an investment portfolio with index funds and blue chip stocks has very little risk. It will also provide a much bigger return than what one gets in the employer or state pension fund. This grows the nest egg at a much faster pace, and since the retiree doesn't have to work, it's possible to add to the nest egg by working elsewhere (rules permitting).

There are a couple of points worth remembering here. First, make sure that the retirement pension fund allows retirees to withdraw a part of the total amount tax-free and there's no clause against finding work elsewhere. Another possibility is that sometimes the fund will allow people above a certain age to make a withdrawal even if they're not actually retired.

Either way, the point is to make sure that the retiree is able to get enough money to invest in a diversified portfolio while continuing to work and earn money. It is important to continue making regular contributions to the pension fund as per the retirement planning. At the same time, it should now be possible to set up a parallel and separate investment portfolio.

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