INSURANCE . RETIREMENT . INVESTMENTS
When we hear the term “pension plans”, we associate it with retirement, and assume that it is something we should consider later in life. However, it is never too early to start a pension plan. In fact, the earlier you start a pension plan, the greater your returns could be, giving you and your family peace of mind and allowing you to enjoy the luxurious retirement that you deserve.
A pension is essentially an annuity plan. It's a long term investment that is issued by an insurance company designed to help protect you from the risk of outliving your income. Through annuitization, your purchase payments (contributions) are converted into periodic payments that last for your life.
Another great benefit of a registered annuity are the tax benefits one receives from their contributions- up to 25% of their annual contributions. For example if one contributes 12,000 annually to a pension plan, he or she can receive up to $3000 back from their annual tax returns. Unlike other savings and investment plans, a pension plan provides you with the safety of a GUARANTEED INCOME at retirement for the rest of your life that you cannot outlive.
The earlier you start a pension plan the better. How early? As early as one has a stable job and income.
Why so early? Because compound interest is your friend. Compound interest—the process by which a sum of money grows exponentially over time—is one of the best reasons to start saving early. If you're unfamiliar with the term, compound interest is the process by which a sum of money grows exponentially due to interest more or less building upon itself over time. Technically your money grows three times as quickly with compound interest than it would with regular interest. Let me paint a better example:
Let’s say you start investing in the market at $100 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.
Who will have more money saved up in the end? Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.
Remember, the longer you wait to plan and save for retirement, the more you'll need to invest each month. While it may be easier to enjoy your 20's with your full income at your disposal, it will be harder to put money away each month as you get older. And if you wait too long, you may even need to postpone your retirement.
You may think you have plenty of time to start saving for retirement. After all, you are in your 20s and have your whole life ahead of you, right? That may be true, but why put off saving for tomorrow when you can start today
Today we have brought you the benefits of pension plans, and why you should consider starting one.
What is a Pension Plan? - A pension plan is a special investment policy which requires the policyholder to make monthly contributions towards a fund for a specific period. After this time has elapsed and the required contributions have been made, the policyholder is now entitled to a 25% lumpsum payment from the fund with the remainder being paid to the person for the rest of their life or the policyholder may forgo the lump sum for larger monthly payments.
Financial safety net – A pension plan acts as a long-term savings fund and this provides you with a pool of wealth that you can use to increase your financial stability, take care of debt and manage your expenses.
As pension plans require a certain amount of time to be made accessible, it helps to create discipline as you are unable to access the funds and limits frivolous spending.
Leave something behind for your loved ones – The pay-out from a pension plan can be done in two ways. The first is a monthly payment for the rest of your life that is equivalent to the total amount accumulated over the course of the plan and the second is a lump sum payment that is paid in full to the policyholder. However, you have the choice of adding your loved ones as your beneficiaries so that they are taken care of if you are not around.
Compounded interest – Pension plans offer you the benefit of compounded interest rates the earlier you start, and this allows you to build up quite a healthy pool of wealth by the time you are ready to retire.
For example, in the first year, you will benefit from interest returns on your original contributions. By the second year, you will earn interest on the initial contribution PLUS the returns from the first year. This effect continues for the duration of the plan, which can be 30+ years.
Policy flexibility – The flexibility of a pension plan allows you to adjust the plan based on your current circumstances. If you are switching jobs, going through a period of unemployment or would simply like to pause your payments temporarily, you may notify your financial advisor or pension plan provider and have your plan adjusted to suit.
Tax relief – Lastly, pension plans count as tax relief items, and therefore the money you contribute to a pension plan is free from taxes. That means the wealth you have accumulated in your plan is entirely your own.
These benefits extend further when you reach retirement age. For example, when you reach the retirement age of 55 you may take 25% of your accumulated pension fund in a lump sum payment and devote the remainder towards purchasing an annuity that remains in effect for the rest of your life.
Pension plans bring you great returns for a small contribution per month and everyone should have one to financially safeguard their future and the future of their loved ones.
Thanks for joining us for this week’s article. Have a safe and enjoyable weekend and please join us again next week for more!