By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals. Upon retirement, you will need to make important decisions pertaining to your retirement plans which will affect your financial situation for the rest of your life.
Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances.
Sources of Retirement Income
Now that you’ve created your retirement plan, it’s time to work towards making those plans a reality.
Defined Benefit Plans
Defined Contribution Plans
Defined benefit plans have the following characteristics:
- Employer sponsored
- Tax-deferred retirement savings vehicles
- Promise a specified monthly benefit at retirement to eligible employees
- May calculate retirement benefits by using a formula that considers factors such as salary, and years of service
Defined contribution plans have the following characteristics:
- Employer sponsored
- Tax-deferred retirement savings vehicles
- Provide an individual account for each participant
- The employee and employer may both contribute to the employee’s account
- Benefits are based upon contributions, plus or minus income, expenses, gains and losses
- Participants have choices when taking money out of plans
It is important to consider how your employer pension is affected when you change jobs, and the importance of re-investing your lumpsum in another pension product to ensure the growth of your retirement savings is not compromised.
Taking Money out
of Retirement Plans
Retiring or changing jobs? Consider your options when withdrawing money from your company pension plan.
It is important to weigh these options to ensure your selection is best suited to your long-term financial plan. It is also important to avoid using a lump-sum to fund other interests, as this will affect your long term financial plans.
Leave money in the plan (if allowed)
- Cannot make additional contributions
- Limited investment choices
- Another account to monitor
- Avoid penalties
- Plan may change
Transfer money to new employer’s plan (if allowed)
- Can continue to make contributions
Receive a lump-sum distribution
- You receive the entire qualified plan account balance
- Pay taxes due
- Penalties may apply if conditions are not met
Receive monthly annuity payments (if allowed)
- Select an annuity income option
Annuity
Income
You can usually receive your retirement plan distribution as an annuity. The monthly income you receive is taxed as ordinary income. The income you receive from an annuity can be doled out monthly, quarterly, annually or even in a lump sum payment. The size of your payments is determined by a variety of factors, including the length of your payment period.
You can opt to receive payments for the rest of your life, or for a set number of years. How much you receive depends on whether you opt for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of your annuity’s underlying investments (variable annuity). There are several options available when selecting an annuity program and these choices must be made carefully, as once a distribution plan is selected it usually cannot be changed.
Tax
Considerations
Your financial institution or insurance company can provide you with information on the annuities they provide. The annuity you purchase must be approved by the Board of Inland Revenue to benefit from the tax deduction. The total of your pension contributions, National Insurance contribution and your approved annuity premiums must not exceed TT$50,000.00 in any given tax year as of 2018. Any annuity premiums above this amount are not tax deductible.
Your annuity will mature when you are between 50 and 75 years old, depending on the terms of your annuity. If you decide to withdraw your money before the maturity date, you will only receive a refund of your premiums. You will also be subject to a 25% tax on the amount you withdraw. An employer may elect to purchase a corporate annuity on behalf of an employee. The employer alone contributes to this type of annuity.
Early Retirement
Considerations
Want to retire early – that is, before ‘normal’ retirement age? The big challenge – a problem most of us are glad to have – is that we’re living longer. Retire in your mid-fifties and you could live for 40 years or more in retirement.
For a longer retirement period, you’ll need a larger nest egg than if you retired later, you’ll have fewer years to build that nest egg. Early retirement also means smaller pension plan benefit amounts.
When you retire early, you may need to replace corporate benefits you lose e.g. health insurance, and may still have major expenses to fund such as a mortgage and children’s education. The challenges of early retirement are not just financial. What are you going to do with your time? Will you be bored during retirement?
Although early retirement may sound appealing, be sure you’ve thought through the financial and non-financial issues before taking the plunge.