Living a comfortable retirement is of course the dream of all of us. Therefore, pension funds are something that we often hear about these days.
Pension funds are one of the various fund programs that we must prepare from now on. If an emergency fund is prepared to meet emergency needs such as layoffs or accidents, we must prepare a pension fund so that the quality of our old age is guaranteed. So, there is no particular difference from today when we are still productive.
Then, how much fund should we prepare for retirement needs? What products can we try to meet the needs of this pension fund?
In this article, you can answer questions that are still confusing about pension funds. KitaLulus will explain and provide examples of calculating retirement funds for you to apply.
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Come on, just read this article to the end!
Definition of Pension Fund
Quoted from Law Number 11 of 1992 , a pension fund is the collection of a fund for preparation for life in old age which aims to assist the state in increasing community participation in the country’s development process.
It can be concluded that people who understand pension funds are people who do not burden the state. This is because the pension fund will be a provision for living old age without the need for state assistance. So, the increase in the country’s development continues to occur because people who prosper until old age or retire.
The law also becomes the government’s official regulations regarding pension funds. It also regulates how payments and disbursements are made if using pension fund products from the government.
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Pension Fund Functions
One of the important tools for achieving financial freedom in retirement is to prepare an adequate retirement fund. The following is a detailed explanation of the functions of pension funds.
1. Achieving Financial Freedom in Retirement
Pension funds are designed to provide financial freedom after retirement. By having sufficient retirement funds, you can live a decent life without depending on active income. The main purpose of pension funds is to provide financial stability and reduce worries in old age.
2. Fulfilling the Increasing Needs of Life
Retirement is often seen as a time to enjoy the fruits of your labors over the years. However, to enjoy retirement well, you need sufficient funds to meet increased living expenses, such as health care costs, vacations, or new hobbies.
Adequate retirement funds will ensure that you can live a comfortable life and fulfill your old age desires.
3. Protect Yourself from Financial Risks
Without adequate retirement funds, you are at risk of facing financial difficulties when you retire. High living costs, inflation, or medical emergencies can place a huge financial strain on your retirement life.
With sufficient retirement funds, you can protect yourself from these financial risks and avoid being trapped in difficult situations in old age.
4. Provide Protection for the Family
Retirement funds not only provide benefits for yourself, but also for your family. If you have sufficient retirement funds, you can provide financial protection to spouses or family members who depend on you.
This is important to ensure that your family remains protected even after you no longer have active income.
5. Planning for the Legacy for Future Generations
As well as providing immediate benefits for your retirement, a good pension fund also allows you to plan for an inheritance for future generations. You can determine how retirement assets will be given to your family or charitable organizations you care about.
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By planning your inheritance wisely, you can leave a positive mark in the lives of loved ones after you are gone.
Pension Fund Benefits
Retirement funds will be very useful in old age if prepared as well as possible early on. Here are the benefits that you can get.
1. Financial Security in Retirement
One of the main benefits of a pension fund is that it provides financial security in retirement. By having an adequate pension fund, a person does not need to depend on family or government assistance to meet their daily needs.
2. Maintain Lifestyle After Retirement
Adequate retirement funds allow a person to maintain the desired lifestyle after retirement. With sufficient retirement funds, one can continue to do activities and enjoy hobbies without having to sacrifice financial comfort.
3. Protect Yourself from Inflation
Inflation is a general increase in the prices of goods and services over time. In the long run, inflation can reduce the purchasing power of money. A well-invested pension fund can help protect a person from the effects of inflation and ensure that the value of the pension is maintained.
4. Reducing Family Burden
By having sufficient retirement funds, one can reduce the financial burden on the family. One does not need to rely on financial assistance from family members to make ends meet in retirement.
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Types of Pension Funds
There are three types of pension funds that are usually used in Indonesia. The three types of pension funds are as follows.
1. Employer Pension Fund
Pension fund services are still rarely provided by companies. However, many companies already provide this benefit to their employees.
All monthly contributions will be made by the company which will be recorded in the employee’s pay slip.
2. Financial Institution Pension Fund
Have you ever gotten a call from a bank that offers old age insurance services? The second type of pension fund comes from financial institutions, such as banks.
This type of pension fund can be carried out by employers or by individuals independently.
If by the employer, it means that the company in the pension fund service for its employees cooperates with certain banks or financial institutions to manage employee pension funds.
3. Profit Based Pension Fund
Furthermore, the type of pension fund is based on profit. This type actually comes from an institution outside the employer. So, employees who are provided with pension fund facilities at the company will get multiple pension fund services. However, in general it will be in the form of a health fund specifically for retirement.
Pension Fund Products
The government has several implementation pension funds, namely Jamsostek which is specifically for all employees under the Ministry of Manpower; taspen addressed to civil servants; and ASABRI specifically for armed forces under the ministry of defense.
For pension fund products, Indonesia has 2 types of products, namely:
1. Defined Benefit Pension Plan (PPMP)
The first pension fund product is PPMP, short for defined benefit pension program.
The method of payment for this product is by deducting the employee’s salary every month. So, the company helps the pension fund program which is also known by employees whose collection is in a separate account to be given later when it’s time.
How much is the fee? The nominal contribution will be adjusted to the amount of the employee’s salary with the amount agreed with the company.
2. Paști Contribution Pension Program (PPIP)
The second product is a defined contribution pension plan or PPIP. If contributions from the first product are made by deducting the employee’s salary, PPIP is carried out by the employee and the company. The collection is also in a separate account that can be disbursed when the time comes.
How to Calculate Retirement Funds
Then, how do you calculate the retirement funds that we will need in the future? What’s more, we don’t know how old we will live.
You can refer to existing statistical data. It is known that life expectancy in Indonesia is at the age of 71 years. Then, let’s say the retirement age in Indonesia is 60 years. That way, there are 11 years left where we are no longer productive to generate wages each month.
That way, we have to collect the pension funds we need for the next 11 years.
Example of Pension Fund Calculation
The way to calculate a pension fund is similar to calculating an emergency fund, which is adjusted to everyone’s lifestyle, it’s just different in the amount of time we need.
To better understand this, here is an example of calculating a pension fund that you can learn.
The average amount you usually spend each month = IDR 4,500,000
Difference in the number of years between life expectancy and retirement age = 11 years
Required pension fund = IDR 4,500,000 x 12 (months) x 11 (years) = IDR 594,000,000.
The amount of funds is current needs, not including changes in nominal needs due to the impact of inflation and deflation. So, it’s best if you save your retirement funds in financial instruments that will provide consistent benefits in the long term.
Investments for Pension Funds
Pension fund investment plays an important role in optimizing fund growth efficiently. Some common types of retirement fund investments include:
- Stocks : Stock investments can provide high growth potential in the long term, but also involve higher risks.
- Bonds : Bonds are a more stable financial instrument and provide a steady income. They tend to have a lower risk compared to stocks.
- Mutual funds : Mutual funds are a popular choice due to their diversification and professionalism of investment management. They allow individuals to invest in various financial instruments.
It is important to have the right investment strategy based on your goals, risks and risk preferences. Also, you must understand the risks and rewards involved in each type of retirement fund investment.
Those are the things you should pay attention to about retirement funds. Because retirement funds are one of the funds that you must know and prepare from now on, when you are still confused, you can consult with a financial planner . The financial planner will help you in managing your finances.