Module -3

retirement
Planning
By Prof. Devita Movaliya
SEBI,NCFE,NISM,CED
Resource Person
 Retirement Planning:

• Setting personal financial goals. Life cycle

approach to financial planning. Retirement
Need Analysis, Various retirement schemes
such as Employees Provident Fund (EPF),
Public Provident Fund (PPF), Senior Citizen’s
Saving Scheme, Insurance Policy for
Retirement, National Pension Schemes (NPS),
Superannuation Fund, Gratuity, and Post-
retirement counselling, Reverse Mortgage.
 What is Retirement Planning?

• Retirement planning is a process of setting retirement income

goals and following them with the actions necessary to achieve
those same goals.
• An easy rule of thumb says that you’ll need to replenish 70% to
90% of your pre-retirement income to lead a good retired life. This
means if you’re making ₹ 70,000 a month (before taxes), you
might need ₹ 49,000 to ₹ 63,000 a month in retirement income so
as to enjoy the same standard of living you had before retirement.
For example, if somebody plans to retire in next 15 years, then
retirement planning would have to include creating a system to
actually generate ₹ 49,000-63,000 per month income from year
2034 when they retire.
• If you are targeting 70% of your pre-retirement income for
post-retirement usage, then you need to not only save, but also
invest properly. This would mean investing in high-return assets so
that your savings grow at faster rate.
 Life cycle approach to financial
planning.
• The approach used to identify financial
objectives for each stage and to provide the
strategies and plans to meet these objectives,
while taking care that these must take into
account the different objectives for later
stages, is called life-cycle planning.
Life cycle approach to financial
planning.
 Financial Life Cycle Stages

Stage 1: Basic Wealth Protection

Focus on building financial security

Stage 3 Stage 2: Wealth Accumulation

Stage 2 Head of household has reached peak
Stage 1 earning years, is accumulating wealth, and
approaching retirement

Which stage of the Stage 3: Wealth Distribution

financial life cycle are The consumption of wealth, usually during
you in? retirement
What types of financial planning would occur
during each stage of the financial life cycle?
Stage 1: Basic Wealth Protection
(protecting your future)
• Develop emergency savings
• Develop positive credit
• Begin investing in retirement
Stage 3
• Purchase insurance
Stage 2
Stage 2: Wealth Accumulation
Stage 1
(giving it to yourself)
• Investing to build wealth
• Purchasing a home
Stage 3: Wealth Distribution
(giving it to your chosen ones)
• Estate planning
 Typical Financial Life Cycle

Stage 3
What factors or events in a
Stage 2
person’s life could cause the
Stage 1
typical financial life cycle to
change or vary?
 Traditional Age Group Financial
Planning Needs

Young
adult:
18-24

– Establishing a household
– Training for a career
– Earning financial independence
– Determining insurance needs
– Establishing credit
– Establishing savings
– Creating a spending plan
– Begin investing in retirement
– Developing a personal financial identity
 Traditional Age Group Financial
Planning Needs
Adult with
or without
children:
25-34

– Child-bearing
– Child-raising
– Expanding career goals
– Investing in retirement
– Managing increased need for credit
– Discussing and managing additional insurance needs
– Creating a will
– Starting an education fund for children
 Traditional Age Group Financial
Planning Needs

Working
parent or
adult:
35-44

– Upgrading career training

– Developing protection needs for head-of-household
– Investing in retirement
– Establishing retirement goals
– Building on children’s education fund
– Need for greater income due to expanding needs
 Traditional Age Group Financial
Planning Needs
Midlife:
45-54

– Assisting with higher education for children

– Investing in retirement
– Updating retirement goals and plans
– Developing estate plans
 Traditional Age Group Financial
Planning Needs

Pre-retireme
nt: 55-64
– Consolidating assets
– Re-evaluating property transfer
– Investing in retirement
– Evaluating expenses for retirement and current housing
– Planning future security
– Investigating retirement part-time income or volunteer work
– Meeting responsibilities of ageing parents
– Planning for long-term care insurance and medical care in
retirement
 Traditional Age Group Financial
Planning Needs
Retired:
65 and
older

– Re-evaluating and adjusting living conditions and

spending as related to health and income
– Adjusting insurance programs for increasing risks
– Finalizing will or letter of last instructions
– Acquiring assistance in management of personal
and financial affairs
– Finalizing estate plans
 Need for retirement planning
• To be prepared for longer life
• To be emergency ready
• To fulfill retirement goals
• To flight inflation
• To leave legacy (for family)
• To maintain standard of living
Retirement Schemes
 Employes Provident Fund
• Employees’ Provident Fund is a statutory benefit
payable to employees working in India. The
Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952 ("Act") is applicable
pan-India. The administration and management of
Employees’ Provident Fund (EPF) is carried out by
the Central Board of Trustees (CBT) established by
the Central Government consisting of
representatives of the Government, employers
and employees respectively. The Employees’
Provident Fund Organization (EPFO) assists this
Board in its activities.
• Applicability
Employees’ Provident Fund has been set up under The Employees’
Provident Fund and Miscellaneous Provisions Act, 1952 (“Act”)
applicable pan-India. The Act is applicable to every factory or
industry mentioned in Schedule 1 of the Act, wherein 20 or more
persons are employed or to any other establishment which the
Central Government specifies by notification in the official
Gazette, even when the number of employees is less than 20.
• Eligibility to be the member of EPF
Enrollment for PF membership is mandatory for:
1. Any person employed for wages for any work of an establishment
either manual or otherwise.
2. Any person employed through a contractor or engaged as an
apprentice but not being an apprentice under Apprentices Act,
1961.
3. Any person under the standing orders of an establishment,
earning less than or equal to Rs. 15,000 per month other than the
excluded and exempted employees under Section 17 of the Act.
 Benefits
• Employees can take advances or make withdrawals.
• PF amount of a deceased member is payable to the nominees or legal
heirs.
• The employer not only contributes towards the PF but also makes the
necessary contributions towards the employee’s pension which can be
used by the employee post-retirement
• Under the EDLI Scheme employees are properly insured in order to avail
the lump sum benefit at the time of death while in service.
• EEE (Exempt, Exempt, Exempt) tax benefit under the Income Tax Act
enables tax-free returns for the employees.
• Employees receive special benefits in the form of added income to their
savings in the form of interest.
• PF account can be transferrable if any member changes employment from
one establishment to another where such Provident Fund scheme is
applicable.
 Public Provident Fund (PPF)
• Public Provident Fund (PPF) was introduced in
India in 1968 with the objective to mobilise small
savings in the form of investment, coupled with a
return on it. It can also be called a
savings-cum-tax savings investment vehicle that
enables one to build a retirement corpus while
saving on annual taxes. Anyone looking for a safe
investment option to save taxes and earn
guaranteed returns should open a PPF account.
 Importance of Public Provident Fund
account
• PPF account is one of the best investment options
for individuals who have a low-risk appetite.
• PPF is a government-backed scheme, and the
investment is also not market-linked. Due to this,
it offers guaranteed returns to protect the
investment needs of many people.
• As the returns from PPF accounts are fixed, they
are used as a diversification tool for the investor’s
portfolio. Additionally, they also offer tax-saving
benefits.
 Benefits of PPF account
• Risk-free returns as the returns are not dependent on the
market volatility.
• Compounded interest rate.
• Income tax deduction u/s 80C of the Income Tax Act, 1961.
• Long-term investment for 15 years.
• Loans and advances against PPF balance.
• Low investment amount of Rs.500.
• Unlimited extension facility of PPF account in the blocks of
five years upon maturity.
• Partial withdrawal facility from the seventh financial year
onwards.
 Where to open a PPF account?

• You can open a PPF account either at the Post Office branch nearest to you or at a participating
bank branch based on your convenience. The participating banks that offer a PPF account are
given below.

• Bank of Baroda
• HDFC Bank
• ICICI Bank
• Axis Bank
• Kotak Mahindra Bank
• State Bank of India
• Bank of India
• Union Bank of India
• Oriental Bank of Commerce
• IDBI Bank
• Punjab National Bank
• Central Bank of India
• Bank of Maharashtra
• Dena Bank
 Senior Citizen’s Saving Scheme
The Senior Citizens Savings Scheme (SCSS) was launched
with the main aim of providing senior citizens of the
country a regular income after they attain the age of 60
years old. Some of the main benefits of the scheme are:
• Tax benefits are provided
• Safe to invest in the scheme
• Interest rate has been reduced from 8.6% to 7.4%
• Premature withdrawal is allowed
• The scheme comes with various security features and
provides individuals a savings option for the long run. The
SCSS is available at post offices and certified banks across
the country.
 SCSS Features
• Maturity of the scheme: The maturity period of the scheme is 5 years. However,
individuals can extend the maturity duration for 3 years by submitting an application
in the required format within one year of maturity of the account.
• Nominations: Nominations can be added to the policy at the time of opening an
account or after the account has been opened.
• Number of accounts: Individuals are allowed to operate more than one account by
themselves or open a joint account with their spouse.
• Minimum and maximum amount: Only a single deposit is allowed to be made in the
account. It can be in the multiples of Rs.1,000 and the maximum amount that can be
deposited is Rs.15 lakh. Deposit amounts less than Rs.1 lakh can be paid by cash,
while amounts more than Rs.1 lakh must be paid by cheque.
• Transfer of an account: An SCSS account can be transferred from a bank to a post
office and vice versa. The process to open an SCSS account is also easy and
hassle-free.
• Premature withdrawal: After one year of opening the account, premature
withdrawal is allowed. However, a 1.5% charge and a 1% charge of the total amount
deposited will be charged in case of premature withdrawals after 1 year and 2 years,
respectively.
 Insurance Policy for Retirement
or pension plan
• A pension plan is a fund that you build throughout your life to
ensure a permanent source of income after your retirement. It is
an investment that grows through regular contributions. So, when
you plan for your retirement at an early stage in life by purchasing
the best pension plan in India, it helps secure a sizeable fund.
• In general, there are different ways in which pension plan
functions. For example, an individual's pension fund may be
created by sharing the contributions between their employer and
themselves. In this case, the employer is usually responsible for
the larger percentage of it.
• Additionally, an individual can create a pension fund by depositing
a certain amount monthly. Then, upon retirement, the person is
eligible to receive the payments as an annuity, depending on the
pension information. For the same, it is critical to explore the best
pension plan in India, to realise which one suits your need the
best.
 Benefits of retirement plans
1. Guaranteed Vesting Benefit: With retirement plans, you will get a fixed
or guaranteed income to help you with your retirement planning. Not
only this, but you might also get an option to provide the income to your
spouse in case of your untimely death.
2. Death Benefit: Pension plans also provide a death benefit for the
financial security of your family in your absence.
3. Flexible Premium Payment Terms: With retirement and pension plans,
you also get the flexibility to choose the premium payment term. You
can select your premium payment term depending upon your financial
goal.
4. Customize your Retirement Plan: With additional riders, you can
customize your retirement plans to help you and your family avail
additional protection.
5. Tax Benefits: Pension plans and retirement plans qualify for tax
deduction under Section 80CCC of the Income Tax Act, 1961. You can
avail tax deduction up to Rs.1.5 lakh for the purchase of a new policy.
 National Pension Schemes (NPS)

• National Pension Scheme (NPS), a

government-sponsored pension scheme, was
launched in January 2004 for government
employees. It was opened to all sections in 2009.
A subscriber can contribute regularly in a pension
account during her working life, withdraw a part
of the corpus in a lumpsum and use the remaining
corpus to buy an annuity to secure a regular
income after retirement.
 Benefits of NPS Account
National Pension System (NPS) is based on unique Permanent Retirement
Account Number (PRAN) which is allotted to every subscriber.
• Regulated: NPS is regulated by PFRDA (Pension fund regulator under Ministry of
Finance, Govt. of India.) which ensures transparent norms governing the activities.
NPS Trust ensures adherence to the guidelines through regular monitoring.
• Voluntary: It is a voluntary scheme for all citizens of India. You can invest any
amount in your NPS account and at anytime.
• Flexibility: You have the flexibility to select or change the POP (Point of Presence),
investment pattern and fund manager. This ensures that you can optimize returns as
per your comfort with various asset class (Equity, Corporate Bonds, Government
Securities and Alternate Assets) and fund managers.
• Economical : NPS is one of the lowest cost investment products available.
• Portability: NPS account or PRAN will remain same irrespective of change in
employment, city or state.
• Superannuation Fund transfer: NPS account holders can transfer their
Superannuation funds to their NPS account without any tax implication.
• Tax Benefits:You can claim tax exemption upto Rs. 50,000 under section 80CCD (1B).
This benefit is over an above limit of Rs. 1,50,000 under section 80C.
Types of account
Pension Fund Manager (PFMs) in NPS

Your contributions are managed by the PFMs who are appointed

by PFRDA and are governed by regulatory guidelines. You have
complete flexibility to choose any of the following 7 PFMs:
• Aditya Birla SunLife Pension Management Limited
• HDFC Pension Management Company Limited
• ICICI Prudential Pension Funds Management Company Limited
• Kotak Mahindra Pension Fund Limited
• LIC Pension Fund Ltd
• SBI Pension Funds Private Limited
• UTI Retirement Solutions Limited
 Superannuation Fund
• A superannuation fund is a retirement fund offered by your employer. The employer
contributes 15% of your basic salary to this fund. It is not mandatory for you as an
employee to contribute to the fund, but you may do so if you wish.
• Employers generally take group superannuation policies with insurers such as LIC,
which maintains both the group account and your individual account. The principal
amount, interest and profits made through investments in funds (by the insurer) are
deposited in your individual account. The rate of interest is usually similar to
provident fund rates.
• When you retire, you can withdraw 25% of this superannuation fund amount, and
that amount is exempted from taxation. The remaining 75% is invested in an annuity
fund in your name, to ensure regular returns during your retirement period. You can
choose to receive annuity returns either monthly, quarterly, half-yearly or annually.
This amount that you get periodically, will be considered as an income and hence is
taxable.
• If you change jobs and the next employer does not run a superannuation scheme,
then you can either withdraw the whole amount or let the fund continue until your
retirement.
 Approved Superannuation Fund

• An approved superannuation fund is a fund that is

approved by the Commissioner of Income Tax.
The rules pertaining to this can be found in Part B
of the Fourth Schedule of the Income Tax Act.
Superannuation funds are approved by the
Income Tax Commissioner based on whether or
not they are meeting certain conditions. You can
confirm from your employer whether your
superannuation fund is approved or not. Tax
exemptions are available only to approved
superannuation funds.
 Taxes Applicable on Approved
Superannuation Fund
• Employee’s contribution (under Section 80C of the Income Tax
Act, which puts a cap of investment under the section at Rs. 1.5
lakh) is exempt from taxation.
• You do not have to pay tax on interest received on the
superannuation funds.
• Up to Rs. 1 lakh of employer’s contribution to a superannuation
fund is exempt from tax. Any amount above Rs. 1 lakh will be
subject to taxation.
• If an employee wants to withdraw their superannuation fund at
the time of resigning from a company, the entire amount will be
subject to tax. The amount will be added under ‘Income from
Other Sources’ and will be taxed as per the income category the
total falls under. There are exceptions to this rule, as you will see
below.
 Exceptions Over Payment of
Superannuation Amount
• Under Section 10(13), payment of superannuation amount
is not taxable under the following circumstances:
• If the payment is made after the death of the employee to
their heirs;
• If the payment is made as refund of contributions on the
death of the employee;
• If the payment is made to an employee as an annuity plan
after their retirement (voluntarily or due to age limit);
• If the payment is made to an employee who is incapacitated
by a disability or illness or other reasons
• Contributions made before April 1, 1962 are exempt from
taxation.
 Gratuity
• Gratuity is a benefit that is payable under the
Payment of Gratuity Act 1972. Gratuity is a sum of
money paid by an employer to an employee for
services rendered in the company. But, gratuity is
paid only to employees who complete five or
more years with the company. It is generally a
token amount paid by the company showing
gratitude towards the employee for their services
towards the organisation. The gratuity amount is
totally paid by the employer without any
contributions from the employee.
ELIGIBILITY CRITERIA FOR PAYMENT
OF GRATUITY?
1. Should be eligible for superannuation.
2. Should be retired from service.
3. Should have resigned after uninterrupted
employment of 5 years with the company.
4. In case of your death, the gratuity is paid to the
nominee or you in case of disablement on account
of a sickness or an accident.
 FORMULA FOR CALCULATING THE
GRATUITY
•
Gratuity Amount = Y x S x 15/26
Where Y – Number of years worked in the organisation, S – Last drawn salary
including DA
So for example, if an employee has been working for a company for 10 years and the
last drawn basic salary including DA is INR 20000, then the gratuity amount will be:
Gratuity Amount = 10 x 20000 x 15/26 = INR 1,15,385
The employer is free to provide the employee higher gratuity, but according to the
Gratuity Act, the amount cannot exceed Rs. 10 Lakhs. Anything above INR 10 lakhs,
the amount is known is ex-gratia, which is a voluntary contribution and not
compulsorily imposed by any law.
 Taxation Rules for Gratuity

The tax treatment of the gratuity amount depends on the type of employee who
has to receive the gratuity.
• The amount of gratuity received by any government employee (whether
central/state/local authority) is exempt from the income tax.
• Any other eligible private employee whose employer is covered under the Payment
of Gratuity Act. Here, the least of the following three amounts will be exempt from
income tax:
– Rs 20 lakh.
– The actual amount of gratuity received.
– The eligible gratuity.
• For example, your employer had paid you a gratuity of Rs 12 lakh. As per the gratuity
calculation, you are eligible for a gratuity amount of Rs 2,59,615. The government
has set Rs 20 lakh as the upper tax-free limit. The lowest of the three figures is Rs
2,59,615, which is exempt from tax. You must pay tax on the remaining amount of
Rs 9,40,385 as per your income tax slab.
• Do note that in your entire working life, the maximum tax-exempt gratuity amount
you may claim, cannot go beyond Rs 20 lakh.
 Post- retirement counselling
• Retirement counseling is the process of providing
prospective retirees with factual information
needed to make a pleasant transition from world
of work into the world of less rigorous
occupational schedules⎯retirement. The concept
includes a review of all insurance policies,
management of personal income during
retirement, explanation of the retirement
process, general information about social security,
medicare coverage and acquisition of life skills
needed for optional adjustment to retirement
roles.
• The retirement counselor would seek to
ensure reasonable management of issues like
accommodation, feeding, children’s school
fees, and maintenance of the family property,
e.g., vehicles or taking care of aged parents.
 Post retirement investment options
• NPS
• Fixed deposit
• Mutual funds
• SCSS
• Pension plans
• Post office monthly income scheme
 Types of Post-Retirement Risks

• The Society of Actuaries (SOA) in the United States has identified a

number of post-retirement risks that can affect income. People
preparing for (or already in) retirement should consider these risks
carefully. They generally fall into these categories:
• Personal and family: Unexpected personal events (including
longevity) or changes to your family (such as early death of a
spouse or family members who need financial support)
• Healthcare and housing: The rising costs of healthcare including
premiums, the need for long-term or nursing care, and other
medical-related costs
• Financial: Inflation, variable investment returns, and a volatile
stock market
• Public policy: Changes to programs like Medicare and Social
Security
 Reverse Mortgage
• In a word, a reverse mortgage is a loan. A homeowner who is 62
or older and has considerable home equity can borrow against the
value of their home and receive funds as a lump sum, fixed
monthly payment, or line of credit. Unlike a forward
mortgage—the type used to buy a home—a reverse mortgage
doesn’t require the homeowner to make any loan payments.1
• Instead, the entire loan balance, up to a limit, becomes due and
payable when the borrower dies, moves out permanently, or sells
the home. Federal regulations require lenders to structure the
transaction so that the loan amount won't exceed the home’s
value. Even if it does, through a drop in the home’s market value
or if borrower lives longer than expected, the borrower or
borrower’s estate won’t be held responsible for paying the lender
the difference thanks to the program's mortgage insurance.
 Ways to receive the proceeds in
reverse mortgage
• Lump sum: Get all the proceeds at once when your loan closes. This is the
only option that comes with a fixed interest rate. The other five have
adjustable interest rates.
• Equal monthly payments (annuity): For as long as at least one borrower
lives in the home as a principal residence, the lender will make steady
payments to the borrower. This is also known as a tenure plan.
• Term payments: The lender gives the borrower equal monthly payments
for a set period of the borrower’s choosing, such as 10 years.
• Line of credit: Money is available for the homeowner to borrow as
needed. The homeowner only pays interest on the amounts actually
borrowed from the credit line.
• Equal monthly payments plus a line of credit: The lender provides steady
monthly payments for as long as at least one borrower occupies the home
as a principal residence. If the borrower needs more money at any point,
they can access the line of credit.
• Term payments plus a line of credit: The lender gives the borrower equal
monthly payments for a set period of the borrower’s choosing, such as 10
years. If the borrower needs more money during or after that term, they
can access the line of credit