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Basics of Retirement Planning

inancial 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. For example, buying a particular investment product might help you pay off your housing loan faster or it might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track. There are different components of planning that an individual comes across during his life. Planning can be for areas like education or marriage or insurance but the most important planning in the entire process relates to the area of retirement planning. Retirement planning is extremely important because the quality of life for a large part of the latter years depends on the kind of retirement planning undertaken. The real reflection of the entire efforts of retirement planning will be experienced by every individual after a period of time. Everyone will have to undertake retirement planning in the days ahead as this will be a solution to a lot of social problems facing the people. This is one area of planning that deserves a very close look and hence everyone should be looking at effective ways to plan well in order to enjoy life after the hard work put in during the best years of their life.

What is retirement planning?

Retirement planning is the process of undertaking financial planning to provide for the period after one retires from work. This means a process of saving and building up a corpus that is invested in various asset classes that will result in income and earning for the individual over a period of time. This income will take care of the fall in receipts as one ceases work on a full time basis after taking retirement. Retirement planning is meant to provide income during old age but with several people retiring early the time period after retiring from work is the period of need. In normal circumstances a person who is receiving say Rs 35,000 per month at the time of his employment in a particular place will cease to receive these funds when he retires. However the need for money due to the various expenses and requirements in life does not cease when one stops working and there will have to be some receipt to replace the earlier income. Planning for it in such a manner that there is a smooth rollover by raising the required revenue will constitute retirement planning. Key features in terms of actual steps in retirement planning: Set objectives for the time of retirement Know the amount of funds required to achieve the objective Set aside funds for specific purposes Ensure that the funds set aside are directed at specific areas of investment The final aim is that the invested funds should achieve the initial objectives Keep monitoring the progress of planning at regular intervals Change the plan if conditions require it and it is off track

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In this planning process the objectives set have to be converted into financial figures and then the amounts required have to be calculated. There is also a process that will help in achieving this part of the objective. Project the need for income at the time of retirement Adjust the amount for inflation based on inflation estimates and expectation This will ensure that the actual amount is calculated The sources of income are to be listed Relevant sources of income are identified Decide on investments at various stages over a period of time This will create future retirement income Mr. Iyer is earning Rs 40,000 a month before retirement. At the time of his retirement in 2020 he expects to have Rs 15 lakh in his Public provident fund (PPF) account, Rs 8 lakh in his provident fund account and various other dues from his employers totaled an additional Rs 8 lakh. In addition he would like to own a house, have some insurance polices while the rest of the requirements should be met by investments in debt and equity holdings in his portfolio. He wants a sum of Rs 1.25 crore on retirement to provide for his future needs. There are several issues to look at in the process of retirement planning for Mr Iyer: The expectations of Mr Iyer after retirement The amount that he would like at retirement and how this is arrived at. This process is already complete in this example but a planner will have to calculate this in real life The earnings from the various sources of investment How the amount available at retirement will be invested to raise the required amount in terms of earnings The areas to be chosen for investment and the actual investment How regularly will the retirement planning process be monitored Why retirement planning? There is a need for retirement planning because the financial situation in the country has changed in the last few years. This has changed in such a manner that it will be difficult for one to maintain a decent standard of living with the current means. This requires retirement planning and in addition there are also several individual specific factors that will affect the process. No fixed return Planning and keeping aside certain sums for retirement is not a new concept in India. Here the savings habit as well as the notion to provide for bad times has been present for a long time. Over the years people have been saving for retirement without using the entire process of retirement planning but the difference now is that the same processes will require a change. Now there is no fixed rate of return that one is sure to earn. Interest rates are not controlled and these change at frequent intervals due to which future predictions become very difficult. There has to be planning for such an uncertain state of affairs. Slowly the concept of a fixed rate is being removed The rate of return are being linked to market conditions

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There is no great benefit for retired people except for a slightly high rate of interest for senior citizens for some bank and other fixed deposits This means that rate of return will change quite frequently Everything depends upon the market conditions including international developments Falling rates on fixed return options The main reason for a change of approach is that earlier it would be possible to maintain income during retirement by selecting various debt instruments for investments. There were a few instruments present in the markets whose rates were fixed and high and hence there was no need for any kind of planning as all one had to do was to keep money into these instruments and the work was done. The change has been quite dramatic and these have to be considered from various angles. The high rate of return has gone This is due to the fall in interest rates across the economy and the world Earlier an investment which would get you 16% would now get you around 8% only This means that to attain the same level of income a higher level of funds is necessary The return rate also fluctuates as debt market conditions change Investment avenues have also changed their features Several of the high yielding investment avenues are now closed for additional investment The rest including post office and small savings are being slowly linked to market rates There is a constant change as rates of return change very frequently Hence one cannot decide years before retirement about the specific route at the time of retirement There are sudden developments that change the return situation These can throw the entire situation completely out of control Beating inflation Inflation is a tough competitor to beat in these circumstances because unlike others inflation keeps on rising at all points of time and this has to be conquered. Falling behind inflation means that there is no way that one can actually improve ones situation in the real sense of the world. A mere rise in the value of assets, if they do not keep pace with inflation will result in a worse standard of living at a later stage when the time comes to use these as funds. Inflation Inflation is nothing but a rise in the prices of various goods and services in the economy Inflation affects an individual from different angles It makes goods and services expensive This means that a person needs additional funds to buy the same goods It affects the value of money A rupee today is worth more than a rupee after some time as inflation erodes the value of money There has to be a higher return to get ahead of inflation Rising medical expenses Apart from the effect of inflation that affects the day to day expense figure there is also the question of rising medical expenses.

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In old age the need for medical expense rises There is often not enough financial support to meet the high expense As one grows older the chances for a medical situation entailing a higher expense rise Simple procedures now cost hundreds of rupees Various tests have become an essential part of the entire process There is a need to protect oneself against the situation through adequate funding All this can be managed with the help of retirement planning The rise in the expense is expected to continue in the future and as people in the country get access to better systems additional amounts on this front will become a must. The techniques on the medical side in terms of development are getting better But with this comes a cost that not everyone can afford World class medical treatment is now available in the country Even small specialised procedures can become unaffordable With new discoveries being made this process is not expected to reverse This makes planning for this absolutely essential There is no other option available for individuals Increased standard of living There has been a rise in the standard of living of people in the country. This is true with respect to a lot of areas that people now come to think as basics relating to consumption of goods or the kind of experience that they have in different walks of life. There has to be financial means that will support this kind of lifestyle Let us look at examples of increased standard of living: 1. Till a few years ago the major communication need for a middle class family was the home telephone. In the case of Mr Naik this expense came to around Rs 750 a month for the family as they had a landline. Today Mr Naik and his wife as well as their grown up daughter have a mobile phone where the billing comes to around Rs 1,500 a month. Further they have a broadband connection in their house which costs another Rs 500 per month. Going to a movie was an experience that Prakash did not enjoy much a few years ago. He preferred to get some VCD and CDs at home to see the movies. This cost him around Rs 20-25 per movie. Now with a couple of multiplexes in his neighbourhood he goes to watch a movie with his wife at least once a month. The bill a cool Rs 600 per visit.

2.

Early retirement Several years ago the office timing for an individual was 9 am to 6 pm and a large part of those employed went home after this. They were able to continue to work for a long period of time spanning decades without facing burnout and several other incidental work pressures. These days working 12-14 hours a day is a very common experience for most people. This puts enormous pressure on the individual where performance and attainment of targets and objectives are all that matters. In such a situation a lot of people would like to take early retirement from work as it is just not possible to carry on for a long period of time. This will be possible only when adequate retirement planning is done so that the individual has the backup of a safe financial future when they plan an early end to their working life.

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Non economic objectives There are a lot of people who would like to spend some leisure time doing something that they actually like. This would be included as a non economic objective. Enjoying such a position would be possible only when one has the time to do such activities apart from worries about funds for day to day living expenses and this will be possible when adequate retirement planning is made Leisure There is an increasing array of leisure options opening up for Indians Many of these like outdoor activities or maintaining a farm or pleasure activities like collecting stamps, art etc could not be easily purchased. These require funds to put them through They require time and commitment from the individual Not always possible to follow along with the normal work Need planning to enjoy these activities Most people postpone a lot of such activities till after retirement

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Exercise
Meenal was 63 years old. She and her husband had both settled their two sons. The sons had gone abroad to complete their graduate studies, and ever since then, Meenal and her husband stayed by themselves in Mumbai. Their sons families with their wives and children would visit them once in 2-3 years and they were happy whenever such a homecoming had happened. But over the years, Meenal had grown from being a 45 year old woman to now being 63 years old. Her husband drew pension after retiring from his service. He had obtained 10 Lakhs from his PPF account. This money was partially commuted to pay back his home loan and the rest of the 6 Lakhs was used to invest into Post Office Recurring deposit, which earned him 8%. He had some investments in RBI bonds and Fixed Deposits to the tune of 3 Lakhs each. Both these investments were drawing interest at the rate of 8% and 7.5% each. The company that he retired from gave him a pension of Rs. 15000 pm. He had a term policy for Rs. 15 Lakhs and a mediclaim policy for a sum assured of Rs. 3 lakhs. They lived in their own house and they were quite comfortable, now that most of the major commitments in life were over. Meenal had running expenses, of Rs. 15000pm. Recently, her husband had to undergo a biopsy and he was operated for prostate cancer. He has to undergo radiation, and chemotherapy along with adjunct therapy. The treatment has been sapping them of their money. The insurance company reimbursed their expenses fully. Meenal and her husband prefer not to depend on their children for any help monetarily. Their monthly outflow on medical related issues is Rs.10000pm. Is the investment money enough to help them get by? Do you think that they took a correct decision by taking a term policy for 15 Lakhs and mediclaim for Rs. 3 Lakhs. Do you feel that all their money has been suitably allocated. Discuss.

Chapter Review

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