A to Z Retirement Plan across Asia You Should Know

November 12, 20192:03 pm1962 views

What is retirement planning?

Retirement planning is the process of determining retirement income goals and the necessary actions to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing savings, as well as managing assets and risks. Generally, a retirement plan is needed in order to ensure employees’ satisfaction with their retirement lifestyles.

According to SoA study, there are three vital reasons why retirement planning is important. The three reasons include maintaining physical health and well-being, having more time with friends and family, and remaining to live in current residence.

Pension system in Asia

OECD Pensions book revealed that National pension provision in Asia and Pacific is very diverse. There is a pension scheme called defined benefit (DB) because the value of the pension is defined relative to individual earnings. Nine countries, including the Philippines, Chinese Taipei, Thailand, Vietnam, India, Pakistan, Canada, Japan, Korea, and the U.S. enable this scheme in their employee pension retirement plan.

See also: Singapore to Raise Retirement Age Amidst Greying Society

Another common scheme is publicly managed but the benefits depend on the amount contributed and the investment returns earnings which are known as defined contribution (DC). Three countries including Hong Kong, Australia, and Mexico use this scheme but it is managed by the private sector. For companies in New Zealand, they do not have compulsory pension contributions but instead they pay a flat-rate benefit to all retirees.

The pension diversity above makes it hard to compare pension systems between countries and evaluate their performance. Nevertheless, there are valuable lessons to be learned from different countries’ pension-system design and their experience with reforming retirement-income regimes.

Retirement facts across Asia

Across Asia, more than half of SoA survey respondents indicated that they receive a traditional pension plan or a DB plan from their employers. In China region, for example, the proportion rises, with around 83 percent indicating that they had access to DB plan. A sizeable number of respondents, especially from Thailand and Indonesia, indicated that they had access to DC enterprise annuities.

However, only around 21 percent of SoA respondents are very confident that their existing employer-sponsored and social pension plans would be adequate to provide for basic living. Even in mature countries such as Hong Kong, Japan, Korean, Taiwan, and Singapore with relatively more developed pension systems, there is a lot of scepticism regarding the adequacy of the pension system.

On the contrary, the younger and optimistic markets of India and Indonesia are more confident in the pension systems’ ability to provide basic living needs. This anomaly could possibly be due to sheer optimism or lack of understanding of old age needs or retirement needs compared to the more developed markets. In other words, retirement planning is more established in developing countries rather than developed countries like Singapore.

Employees and employers across Asia should understand the following points when setting pension rates:

  • If social security and pension payments are not adequate to cover basic expenses in retirement, households will have to create an efficient stream of income from their own savings and investment to last through retirement.
  • Advisor and financial institutions have a critically important role both to educate their clients and to offer financial products and solutions that include guaranteed lifetime income features.
  • Retirees or pre-retirees in markets that do not have or will not have a guaranteed income stream such as government-sponsored programs, pensions, and annuities to cover basic expenses will have to accept a gradual erosion of their retirement lifestyles.
  • Retirees and workers who believe income from pension and government-sponsored program is enough to cover basic needs, as well as aspirational expenses in retirement, might find their expectations unmet as the cost of living rises up with modern standards of living in home countries.
  • Many selected markets are starting to catch up with modern standards of living and health care. So, this sense of retirement security might prove false for many of the young countries and their workers.

Types of retirement plans to apply

Further, retirement plans are tax-related deferred or otherwise tax-advantaged. For employers and office staff, understanding the following types of retirement is necessary to avoid a fine or reduction in a retirement fund. In addition, you need to understand taxation, along with who established and uses each account, and the rules of the plan to best choose the right type of retirement plan for you.

Without further ado, here are the 5 most common retirement plans.

1. Individual Retirement Arrangements (IRAs)

This is an individual retirement account, thus, you open and fund yourself without the intervention of employer. You might receive an income tax deduction on contributions. The balance in the IRA will always grow tax-deferred, and withdrawals will be taxed.

This is good for those who can make deductible contributions and want to lower their tax bill. Individuals who earn too much money to contribute directly to a Roth IRA is also recommended to register in this retirement plan.

2. Roth IRAs

This is an individual retirement account that you open and fund yourself. You will contribute to after-tax money, meaning you will not receive an income tax deduction for contributions. Your balance will grow tax-free and you will be able to withdraw the money tax-free in retirement.

The option is good for you who wants to take advantage of the flexibility to withdraw from an account in retirement without paying taxes and is beneficial for low-income workers.

3. 401(k) Plans

A retirement account offered to employees of a company. The money will grow tax-deferred and you will pay taxes on withdrawals in retirement. Some employers allow you to make after-tax or Roth contributions to a 401k. Yet, you could check with your employer to see if there might be other better options.

This is best for workers whose company offers the option and those who do not have control over their money.

4. Payroll Deduction IRAs

An individual retirement account that is funded through payroll deductions. Taxation is treated the same way as IRAs and Roth IRAs. The option is best for individuals who do not have access to another retirement plan through their employer.

5. Defined benefit plans

Retirement plan provided by an employer where employees’ retirement benefits are calculated using a formula that factors in age, salary, and length of employment. The plan is also known as pension plans. Income taxes are deferred, assessed on distributions from the plan in retirement.

The option is best for companies that want to provide their employees with a defined or pre-determined benefit in their retirement years.

Note: To know more about types of retirement plans, you can visit IRS Government.

See also: What You Should Know about Retirement

(Visited 1 times, 1 visits today)