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Basics of Retirement Planning
Basics of Retirement Planning
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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.
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
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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.
Adjust the amount for inflation based on inflation estimates and expectation
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 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
How the amount available at retirement will be invested to raise the required amount in terms of
earnings
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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 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
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
Hence one cannot decide years before retirement about the specific route at the time of retirement
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
This means that a person needs additional funds to buy the same goods
A rupee today is worth more than a rupee after some time as inflation erodes the value of money
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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
There is a need to protect oneself against the situation through adequate funding
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
With new discoveries being made this process is not expected to reverse
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.
2.
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.
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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Many of these like outdoor activities or maintaining a farm or pleasure activities like collecting
stamps, art etc could not be easily purchased.
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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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