Tag: Retirement

Retirement Time Bomb (60 min video discussion)

Posted on by Jagoinvestor

Here is a 1-hour deep discussion on the topic of Retirement Planning and how India is set to have a massive problem in the coming times (and it’s still going on).

In this video, I talk with Mr. PV Subramanyam (also called as Subra) who is a retirement expert and has also authored a best selling book called “Retire Rich – Invest Rs 40 a day”

What is covered in this video talk?

Here are the discussions which are part of this 60 min talk.

  • What is Retirement (it’s not what you think)?
  • Investors attitude towards retirement
  • Retirement Time Bomb – The future of India
  • Job Opportunities which can be created if Govt address Retirement issue
  • Top mistakes investors do in their retirement planning
  • Where to invest for your Retirement?
  • Why retirement planning has become famous these days
  • How “bad retirement” puts the burden on children
  • A quick and simple way of estimating your retirement corpus
  • Early Retirement – What it means and is it possible?
  • Suggestions for someone who is already late for retirement!

It was a fun-filled talk I did in Pune, and I plan to do more of these talks with various other people in Industry. So keep a watch on it.

Do subscribe to our youtube channel, if you don’t want to miss out on the upcoming videos. Do let us know what you feel about the video and also share your views about retirement planning.

Manish

Congrats loyal employees – Gratuity limit raised from 10 lacs to 20 lacs

Posted on by Jagoinvestor

Do you know anything about gratuity? It is one of the components of your salaried income which you will get at the time of your retirement. A lot of people are not even aware of the term gratuity and tax exemption on this amount.

In this article, I’m going to tell you what is a gratuity, how it is calculated and how much tax exemption you can get on this amount.

Gratuity

Recently limit of gratuity payment has been increased from Rs.10 lac to Rs.20 lac. This hike is a kind of good news for employees who are working in the non-government sector for more than 5 years in the same company.

First of all, let me tell you what is a gratuity.

Meaning of Gratuity

Gratuity is the reward given in the form of money by an employer to his employee for being loyal to the company and completing 5 or more than 5 years of service in the same company.

Various countries have different gratuity limit. In India, this limit was Rs.10 Lac earlier but after implementation of the 7th pay increment of salary this limit has been increased from Rs.10 lac to Rs.20 lac.

Mode of Gratuity payment:

Just like your provident fund gratuity is also paid totally by the employer only. It depends on the employer’s decision that either he will pay you this amount or he may take a group gratuity plan with an insurance company. The employee can also contribute to his gratuity if it is paid through insurance company whereas it is not mandatory.

How gratuity is calculated?

Once you complete 5 years of your service, gratuity will be calculated for 15 days per year of your employment. The total working days considered are 26. It will calculated the number of years of your employment.

While considering years of service if the time period is more than 6 months then it will be considered as 1 year. For example, if your service period is 5 years and 7 months then for gratuity calculation it will be taken as 6 years.

Below are the terms taken into consideration while calculating gratuity:

  1. Last drawn salary including basic pay and dearness allowance.
  2. No. of years of your employment.
  3. Paid for 15 days per year of employment considering working days as 26.

The formula for calculating gratuity is given below.

Gratuity formula

Let’s take an example of gratuity calculation.

Suppose you are working with a company from the last 5 years and 7 months and your salary is Rs.50,000 including DA. Then your Gratuity will be –

= 50000*6*15/26

= Rs.1,73,076.9

At what time gratuity is given?

Gratuity is a kind of superannuation. When a person completes 5 or more years of his service in the same company then he is eligible to get gratuity.

The criteria for gratuity payment is given below.

  • Retirement of employee
  • When an employee resigns the job after completing 5 years.
  • In case of death or permanent disability because of an accident.

The criteria of completing 5 years of employment will be relaxed in case of death or permanent disability caused due to an accident. In this case, the employer will pay gratuity for 15/26 days of every completed year of service.

Companies are supposed to pay Gratuity?

The gratuity act was originally passed in 1972. This act covers all the workers or employee’s in various companies, factories, mines, etc. As per this act, all the companies who have at least 10 employee’s have to pay gratuity.

If a company has 10 employee’s though for a single day in a period of 12 months then the company is eligible for paying gratuity.

Who is eligible to get Gratuity?

There are 3 criteria’s for an employee to become eligible for Gratuity which is as:

  1. The employee should retire after completing 5 years of service in the same company.
  2. Employee must resign after 5 years of service in the same company.
  3. In case the Employee passed away or suffers from any kind of deficiency while he was still working.

Whereas as per the rule under section 4(2), 5 years doesn’t mean 365 days/ year. As per this rule, an employee who satisfies the criteria given below is eligible for Gratuity, the criteria are as –

  • The employee should work 240 days a year – if the company has 6 working days.
  •  The employee should work 190 days a year – if the company has 5 working days

This rule is will not be applicable if the employee dies or becomes disable while he is still working. In that case, the company will provide Gratuity to such employee or the nominee.

Is gratuity Amount Taxable?

In the current situation all the government employee has a tax benefit on their gratuity. There will be no tax on the amount received as gratuity for government employees for state government, central government or a local authority.

For non-government i.e. private sector or public sector employee’s tax exemption is depending upon either the employer company is covered under gratuity act or not.

1. Employer covered under payment of gratuity act:

When a person is working in a private sector and his employer company is covered under gratuity act then he can get tax exemption on his half months salary i.e 15 days salary of every year of his employment.

2. Employer not covered under the payment of gratuity act:

When your employer company is not covered under the gratuity act then you can get tax exemption on any one of the three options given below. Whichever is less will be considered for exemption –

  1. Rs.20,00,000
  2. Actual gratuity received by an employee.
  3. 15 days salary of every year of employment.

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Change in taxable income because of hike in gratuity limit:

Hike in gratuity limit is more beneficiary for employee’s working in private or public sectors. In any case, government employees are getting tax exemption on the entire amount of gratuity payment.Let’s see the difference in tax exemption after this hike in the gratuity limit.

I hope you got an idea of calculating gratuity and tax exemption on it. If you have any query let us know by leaving your reply in the comment section.

Best pension plans in india – Disadvantages and Advantages

Posted on by Jagoinvestor

What are pension plans and how do you identify the best pension plan in India? Is it the LIC pension plans or some pension plan policies from pvt companies or some unit linked plan from companies claiming to provide you with Rs. ‘X’ for ‘Y’ numbers of years once you retires? In this article we will see some of the disadvantages of pension plans in India and how they work.

Pension Plans in India

A lot of investors think that retirement pension plans are the only way to go; and if they do not invest in these products today, then they will miss out on something. In this article let’s talk about pension products. Before I move ahead I would like to coin two terms used in Financial planning which are very easy to understand.

Accumulation Phase : Accumulation Phase is that period of your life, where you invest regularly each month and “accumulate” the Wealth. You start getting pension later in life.  So when you invest your money in ULIP’s, Mutual funds, Direct Stocks or anything else you are into accumulation phase.

Distribution Phase : This phase refers to period when you start withdrawing money from your already accumulated wealth for consumption purpose. So at the time of your retirement or even before that, when you start taking out certain amount per month for next ‘N’ years, that’s called distribution phase.

Best Pension plans in India

Two major categories of Pension Plans

Let me start by taking about pension plans and their types. There are mainly two type of pension plans at broad level.

Deffered Annuity Plans : Most of the pension products in india are sold by LIC and all the private companies are deferred pension plans. These plans have accumulation phase inbuilt in itself and hence you first pay premiums for ‘X’ number of years. Once you retire, then you start getting pension income. You can see these types of plans all over the market. Some examples are LIC Jeevan Tarang, LIC Jeevan Nidhi, Bajaj Allianz Swarna Raksha ROC , New Pension Scheme (NPS)

Immediate Annuity Plans : These products are called immediate annuity plans because they start paying you the annuity right from day one once you make a lumpsum payment. So if a person wants a monthly pension and has huge lumpsum money, he can buy an immediate annuity plan and start getting pension. It’s a simple product which is not so much popular in India like deferred annuity plans. Some of the examples of immediate annuity plans are  LIC Jeevan Akshay , ICICI Pru Immediate Annuity , HDFC Immediate Annuity .

4 reasons why you should not buy deffered annuity plans

Let me tell you 4 strong reasons why you should avoid buying pension plans in India .

1. There are better options for growth of your wealth

The accumulation of your wealth happens in a pension plan for many years, but it’s not the best way your money can grow, ultimately if you had to invest your money in equity (underlying asset class), you have simple and no-cost options like mutual funds, index funds. Also you can choose to put money in real estate. A regular SIP in an equity diversified mutual funds should give much better returns then accumulation in a pension plan (read unit linked products).

2. No predictable returns for annuity

The core function of a pension plan is to give you pension. But do you know how much returns you will get out of your pension plans when time comes for retirement? A lot of pension products do not give a clear idea on how much will you get at the end. What is the return earned is around mere 4%? What will you do? The same is true for NPS.

One major (I mean MAJOR) DRAWBACK is you have no clue what will happen once you finish the accumulation stage and go on to the withdrawal stage. Let us say you have accumulated Rs. 500 lakhs in a NPS account. They allow you to withdraw say 50% of the amount and the balance has to be invested BACK in an annuity. Let us say you ARE FORCED to invest Rs. 250 lakhs in an annuity which pays Rs. 11,000 per month as a pension…looks good? Well depends on what you are capable of doing with your own money!

says PV Subramanyam in this article 

At this point of time, the better alternatives would be old fashioned products like Post office monthly schemes , Fixed deposits with monthly payouts or even senior citizen savings scheme. these all give near inflation returns atleast .

3. Rigidness and no flexibiity

Almost all the pension products are rigid in taxation and what you can do with your money at the end. Under current laws you can withdraw only 1/3rd of your accumulated money tax-free, where as there is long term capital gains at the moment is 100% tax-free. Also it’s compulsory to buy annuity for the remaining money. What if I want all my money for some reason at the end? What if I don’t have a requirement for income later?

These problems won’t be there if you accumulate your money in plain vanilla mutual funds or PPF or other simple investment products.

4. High charges

Who does not know how ULIP’s and other similar products have charged so high costs for initial years without giving clarity to customers. These annuity plans also have high allocation charges many times and customers do not know about it and can’t do much later when he acknowledges it! So why do you want to pay high fees for these products?

Conclusion

It’s suggested that you invest in some instrument which does not have any rigidness on what can be done with your investments at some later stage, like Mutual funds, Direct Equity, PPF, Index Funds, Real estate or even old fashioned products like FD, NSC, KVP… You can create your own accumulation stage and when the time comes for “distribution phase” (pension), you can always buy some immediate annuity plans or create your monthly income through ways of renting out property, getting FD interest or plain dividends from stocks or any combination of these. I hope you have got a fair understanding of what are pension plans in India.

How to plan for retirement and think about retirement in India

Posted on by Jagoinvestor

How will your retirement look like? Have you thought about anything on retirement planning ?

This is something, which you should spend some time on. Our parents and grand-parents might not have given much importance to their retirement, they might have just took it as it came to them, but can we also afford to do the same with our retirement? Would you like your retirement to take shape just like your parents?

Lets discuss it and take some food for thought from this article today. This is the 3rd and last article in the series called “Financial Planning and Social changes in India” . You can read other two parts here and here .

Retirement Planning in India Future

In our country, where a very small number (less than 10% of the workforce which is in the organised sector) has access to some social security like provident funds, but the rest – almost 90% of the workforce – has no social security, Retirement Planning is a major issue .

If you take care of your retirement planning, your future will probably be much better and in control than without doing anything. It has become extremely important to plan for one’s retirement and at least take a step towards it. I will list down some pointers which shows why retirement in future India will be much bigger and serious issue.

Look at all the points in totality and you will realize that planning for own’s retirement is not just an option but a necessity these days.

1. Increase in life expectancy in India

One of the major problem while doing retirement planning is to assume how long the retirement will last. This has a direct relation with life expectancy. As a country develops, its healthcare and overall life style level improves and life expectancy increases. You can see the life expectancy in India is moving up and up with each passing decade .

It was 49 yrs in year 1970 , increased to 64 yrs today in 2011 and is set to increase upto 73-76 yrs in 2040-50 (projections) .

Now this life expectancy of 76 yrs does not mean that everyone will die at age 76 , it’s an average . If you personally have a better life style , better health and better medicare access compared to a average Indian, chances are you will have a much more life expectancy which will cross 85-90 yrs .

Leave future, even today you can see more and more people living upto an age of 80-85 . So, you can safely assume that you will have to accumulate enough money which can last atleast 30-35 yrs after your retirement, else make sure you die with your money itself 🙂 .

Overall the conclusion is “Longer life in future will mean more money required in retirement compared to  today. Simple !”

2. Increase in Dependency Ratio

Dependency ratio means the ratio of Old age population vs Young population. To calculate it, just take total population above Age 60 and divide it with population between 15 yrs – 60 yrs and you will get Dependency Ratio.

You will be surprised to know that right now in 2011 , the dependency ratio is around 5% in India, but in year 2050 this ratio will rise to 15% , which shows you that more and more people are going to be in the old age group compared to young population . See the chart below .

india future age

Source : here and here

This is not a small issue. More and more people will be shifting to this “retired” category in coming decades with more load on the working population.

At this current moment, we are one of the youngest country today with as high as 50% population below 25 yrs of age , but will this continue forever? With more population control measures at government and public level, these numbers are going to be different in future.

Hence the conclusion is “More and more people will come into retired category as percentage of population in coming future”.

3. Decline of joint family structure

If it was 1970 , you could have safely assumed that you will be probably spending your retirement with your grown up kids , playing with your grand children, but is it happening anymore in these changing times?

More and more people are moving in different parts of country in search of education, jobs and settling there compared to old times. Parents on the other hand dont choose to move most of the times as they feel connected to the same place where they have spend all their life and more than that , they have their social groups at those native places.

Very rarely I have seen that parents leave those places where they have spent 30-50 yrs of their life .

Bigger opportunities in life and a complex life style has resulted in smaller family size and its going down each decade. As per research reports of National Family Health Survey , Ministry of Health and Family Welfare (MOHFW), Government of India , average household size in the year 1992 was 5.7, which means each family had 5.7 members, this came down to 5.4 in 1998 and as per last reports of 2007 , average family size is  4.8.

Now imagine this, each family having  approx 4.8 members , that’s today ! . Will it shrink further to 4.0 in coming decades , what do you think ? I think if it does not go down , it will definitely not go up ! . Thats my personal opinion .

This clearly shows that families size are shrinking on average. More and more parents these days are living in their home town where they raised their kids , but kids have moved to other places and settled elsewhere. By no means I am saying that not living together has resulted in less love or less harmony , NO !

All I want to say is people are living separately and “expecting” to live separately now a days.  This will only rise , and not come down by the time you retire.

So the conclusion is “There are higher chances that you will be living separately and not with your kids , by choice or by society structure , unless you are living in smaller towns and villages.”

Change in perception about Retirement Planning

Now leave all the factors we talked above. Lets look at how people today feel about their retirement in coming years. I ran a poll on this topic which was taken by as high as 412 unique participants and you will be amazed to hear that as high as 83% said that they would like to be self-dependent and want to save all the money they would require in their retirement.

Around 10% said that this is the first time they are having any thoughts about their retirement after seeing the poll and just 7% people expect to be fully or partially dependent on their children for their retirement. Which shows us that as high as 93% readers on this blog who participated in the poll want to be self dependent and plan their retirement themselves.

Look at the poll results below .

Retirement Planning in India futureBest Investment for your Retirement ?

So whats the best Investment you can do today which will make sure you live happily in retirement? If you thought that it’s some financial product or a strategy to make some extra bucks, you are wrong ! I am talking about your Health here.

Note that reaching destination is important, but after reaching the destination if you don’t feel joy and happiness and are not able to enjoy the fruits later, all the hard work you will put for reaching for destination will go waste.

You will be living for 25-30 yrs minimum in your retirement, Now if you have all the money , but no proper health at the end, you will not be able to eat what you want, you will not be able to roam around places , you will not be able to enjoy each moment of your life , what’s the use of all your hard-earned money in that case ?

I would say all your efforts will be waste. This is one serious point I want you to take home today. Think about it.

People who are neglecting their health and financial life today are living in illusion that future has a lot for them. Start working on your health today, do a daily SIP investment in your health through exercising in gym or working out in park or at least jogging. lumpsum investments in health does not work , It can only work in your financial life.

I want you to download this e-book called Food and Thought right now.

What do you think about retirement after 30-40 yrs ? I want to hear your action plan for your retirement in comments section. Do you think the points made for Retirement Planning by me makes sense ?

Write us your opinion in the comment section.