Sixty-five percent of the global youth population will reach the elderly stage of their lives, also the retirement stage. At this stage, they are no longer young and active enough to go out to work and earn a survival income from paid employment.
A retirement plan is a systematic approach to cater for a definite future where an individual’s time in the paid employment market comes to an end legally or otherwise. A holistic retirement plan has qualitative and quantitative factors to consider. The desired lifestyle sums up the qualitative factors to be considered. These should include age of retirement, choice of residence and what to spend time doing. The quantitative factors to consider include your preferred method of passive income, choice of pension fund administrator (PFA), life assurance policies, individual retirement investments excluding statutory RSA balances, etc.
There are several ways to set up a retirement plan. In Nigeria, employees are mandated by the Pension Reform Act, 2014 to maintain a Retirement Savings Account (RSA) with a Pension Fund Administrator (PFA) of our choice. Limitless voluntary pension fund contribution is also permitted in addition to the statutory contribution. The voluntary contributions were made tax-deductible (i.e. the participant will pay lower taxes as a result) by the Act in a bid to encourage more savings towards retirement. These monthly contributions are deducted from the individual’s monthly pay. Some people also set up retirement plans on their own in form of long-term investments such as investing in stocks. This is encouraged as when it comes to investments, a diverse portfolio is always recommended.
WHY HAVE A RETIREMENT PLAN?
Tax benefits: Globally, the portion of an individual’s income kept aside as pension contribution is not taxable. Investing in your retirement plan is an effective way of lowering your tax burden. In Nigeria, according to the Personal Income Tax provisions, pension contribution (compulsory and voluntary) and life assurance premium paid are exempted from taxable income.
Cost effectiveness: With a retirement plan, decisions are made from a long-term perspective and could yield over a 100% return as longer-term investments tend to earn more. It could be by acquiring shares of start-ups with high prospects or real estate in your preferred retirement location etc.
One could also opt for a life assurance policy as a retirement plan because the premium paid as a young and healthy individual may be considerably lower due to the lower risk involved as a result of the long-term nature of the investment.
Psychological benefits: Retirement comes with a massive change in the dynamics of one’s life, hence, can take a toll on one psychologically. According to The Nation Newspaper (2017), many government workers in Nigeria admitted to feeling insecure as they are approaching retirement age. Planning and putting appropriate investments in place in time, to a large extent, replaces the fear of financial insecurity in retirement with peace of mind.
Independence in retirement: Every adult today has experienced dependency on others accompanied with limitations on their wants and even needs at times. Reverting to financial dependence in retirement will not be easy on you or your loved ones. Plan today to relieve the burden of tomorrow.
Safeguard against unforeseen expenses: A retirement plan, especially life assurance plans, can prove extremely useful for heavy and unforeseen expenses like medical bills and special treatments which may amount to loss of life if ignored.
Compounding interest: The earlier the better! An individual has about 35 to 40 years of active earning (estimated), where started early, the effect of compounding interest will be fully maximized and can potentially give a substantial gain on the amount set aside.
It is important to take out time to decide on your retirement plan mix that will be able to fund your preferred retirement lifestyle. Stay tuned for our follow-up article on threats to retirement planning.
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