FINANCIAL ADVISING-6

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Retirement Planning
• It is a plan to ensure that there is adequate income
to meet expenses in the retirement stage of life
cycle when salaried income ceases.
• Primary income is the pension drawn from
employer or income drawn from retirement corpus
created during the earning period or a combination
of the two.
• Most people start thinking about retirement only at
the Delta or Echo stage, but it pays to plan early, as
it is relatively easier to build a larger corpus even
with small monthly contributions.
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Mandatory retirement benefit schemes

• Government pension (Government employees on payroll before 2004)

• National Pension Scheme for Government employees in service after 2004.
• Employee Provident Fund- 12%+12% contribution of basic monthly salary
• Employee Pension Scheme-8.33% of the PF contribution
• Gratuity-Half month’s salary for each completed year of service
• Encashment of accumulated earned leaves in employee’s credit

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Optional Pension schemes

• LIC Superannuation scheme (contributory)

• National Pension Scheme (contributory or employee’s own) opened 2009
• Voluntary Provident Fund
• Public Provident Fund
• Pension schemes of insurance Companies
• Pension schemes from mutual funds
• Monthly income plans of Mutual funds

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Steps in retirement planning

• Retirement planning involves the following steps:

• 1. Estimating expenses post retirement
• 2. The income required to meet the expenses
• 3. Calculating the corpus required to generate it
• 4. Determining the savings that can be made at that particular stage for creating the corpus
• 5. Identifying the products in which it would be invested to generate the required income.
• 6. Investing in the products
• 7. Monitor the investment performance periodically & review

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 • Let us assume that individuals A & B, aged 25 & 35 years
respectively want to create a corpus of Rs.1 crore as their
retirement goal when they retire at 60 years. Taking an
Early start benefits interest rate of 12%, the table below shows the monthly
contribution required and the total amount contributed by
each.

  A B
Age 25 years 35 years
Period of contribution (in 420 300
Months)

Monthly contribution 1555 5322

Total contribution 653091 1596724

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 • Let us assume that individuals A & B, aged 25 &
35 years respectively contribute Rs.5000 each
monthly for creating a retirement corpus when
Early start benefits they retire at 60 years. Taking an interest rate of
12%, the table below shows the accumulated
corpus.

  A B
Age 25 years 35 years

Period of contribution (in 420 300

Months)
Monthly contribution 5000 5000
Total contribution 32154797 9394233

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Estimating retirement corpus-1.Income
replacement method

• Ratio of percentage of income just before retirement that is needed to have a

desirable standard of living.
• Gross salary is considered, and the deductions not applicable post retirement are
reduced.
• Simple method which does not factor contingencies.
Gross salary- Mandatory deductions-Income tax-transportation expenses-
savings X 75%

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 • Let us assume that Raj aged 30 years with annual
income of Rs.10 lacs expects to retire at 55. He
1.Income expects his income to grow at 10% and will
replacement method require an income replacement of 75%. The table
shows replacement income calculation.

 Current annual income Rs.1000000

Age 30 years
Remaining years of service 25 (55-30)
Expected income growth 10%
Income at the time of 10834706
retirement 1000000(1+10%)x25
Income replacement required 8126029 75% of Rs.10834706

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Estimating retirement corpus-2. Expense
protection method

• The focus is on identifying and estimating likely expenses in the retirement

years and providing for it thereafter.
• In this calculation, instead of income, the monthly expenses of a person
just before retirement is calculated adjusting for inflation to arrive at the
expense at the time of retirement.
• Simple method which does not factor contingencies.

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 • Let us assume that Raj aged 30 years with
monthly expense of Rs.50000 and expects to
2.Expense retire at 55. He expects additional monthly
protection method expenses of Rs.10000 at the time of retirement.
The table shows monthly expense at time of
retirement, assuming 6% inflation.

 Current monthly expense Rs.50000

Current household expenses Rs. 30000 Assumption is 60% requirement

Additional discretionary exp Rs.10000

Retirement expenses at current Rs.40000
prices
Service period remaining 25 years
Inflation rate 6%
Expense at the time of Rs.171675 40000 (1+6%) x25
retirement
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Building a retirement corpus

• While the first two tables indicated calculation of retirement income

requirement and retirement expense estimation, an individual needs to
understand how the corpus can be built up.
• Here there is an assumption for both the inflation rate and the rate of
return the individual would get on the corpus.
• Abnormal market fluctuations are not factored.

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 • Let us assume that Rani aged 35 requires a monthly
income of Rs.35000 by today’s value when she retires
Calculation of at 60 years. The table shows the retirement corpus
required (@6%inflation & 8% return on investments)
retirement corpus if she estimates her longevity to be 80 years.

 Monthly income required at current Rs.35000

value
Service period remaining 25 years
Income required at time of Rs.150215 35000 (1+6%) x 25
retirement(Inflation adjusted)
Period of sustenance required 20 years
Service period remaining 25 years
Inflation adjusted rate of return 1.89% (1+8%)/(1+6%)-1
Corpus required at generate a monthly Rs.30048832
income of Rs.150215 (using PV formula
Excel) for 20 years

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ESTATE PLANNING

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Estate Planning

• An organized approach to managing accumulated assets of a person in the

interest of intended beneficiaries, after the person dies.
• Goals:
• Avoiding confusion of final wishes
• Children have legal guardian of choice
• Avoid conflict
• Minimize taxes and legal expenses
• Wealth preservation for intended beneficiaries
• (Covers structural, financial, legal & taxation aspects of wealth)
• ESTATE: Includes all assets & liabilities of a person at the time of death.
Consequences of dying intestate

• Estate would be inherited by legal heirs in accordance with the laws of

succession applicable:
• 1. The Hindu Succession Act 1956 (Hindus/Buddhists/Jains/Sikhs)
• 2. Indian Succession Act 1925 (Christians/Jews/Parsis)
• 3. Mohammedan Personal Law ( for muslims)

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Consequences of dying intestate

• Who would end up inheriting property?

• CLASS-1
• Son, daughter, widow, mother, son of pre-deceased’s son, son of pre-deceased’s
daughter, daughter of pre-deceased’s son, daughter of pre-deceased’s daughter,
or even the next generation
• CLASS-2
• Father, Son’s daughter’s son, Daughter’s son’s son, Brother’s son Father’s father
etc.
•

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Elements of Estate Planning

• Identifying beneficiaries and their claims to estate through a Will

• Create trusts to manage estate and make periodic payouts to beneficiaries

• Create organizational structure- trustees, executors, guardians, PoA to

perform identified functions in Will
Tools for Estate planning
During lifetime of individual After death of individual
   
• Trust Will
 
•  
• Joint holding Nomination
 
• Gift  
 
• Family settlement  
 
• Power of Attorney  
 
• Mutation  
 

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Wills & their types

• Will is a ‘legal declaration of the intention of the testator with respect to his
property, which he desires to be carried into, after his death. Codicil is a
supplement to a will.
Types
1.Previliged Will------Oral (soldiers/mariners). Two witnesses required
2.Contingent Will-----Effective upon a contingency
3. Holograph Will-----Entirely in the handwriting of testator but no witness.
4.Joint Will-------------Executed by two or more people.
5. Mutual Will---------Two make mutual will.
6. Concurrent Wills---Generally applies when testator has property in multiple
locations across the world.
7.Duplicate Wills------Made in duplicate
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Terms used in respect of wills

• Testator (Testatrix) - who has died leaving testament or will

• Executor-party named by testator to carry out the terms of the will
including settling of outstanding debts and distributing assets to
beneficiaries
• Guardian- person named in will or appointed by judge to take care of
children or special needs adult
• Probate- process used to make orderly distribution of property as per will
to beneficiaries(copy of registered will)
Validity of Wills
• It is a document that describes how one wants property and owned interests to
be distributed after death. But for Privileged wills, others need to be in writing
although no format is prescribed under law.
• Conditions for valid will:
• Executed as per law of land
• Executant of sound mind at time of preparation
• Executant must understand effects/ consequences
• Must understand nature and extent of property
• Major
• Signed, dated and witnessed.
• WHO CAN MAKE A WILL: Any person having capacity to contract.
Contents of a Will

• Name & address of testator

• Declaration that will is made voluntarily
• Listing of beneficiaries under the will.
• Date & place of execution
• Appointment of guardian
• Appointment of Executor
• Details of trusts created
• Schedule of properties
• Directions for disposal of body after death.

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Clauses in a Will
• Preliminary- identifies testator, declares
will, revocations, family
• Dispositive- disposition of property:
• Bequest or legacy, residuary,
distribution to trusts, classes of
beneficiaries
• Appointment- fiduciary (administrator),
guardian
• Other clauses- no contest
• Concluding- testator’s signature,
attestation
Options for estate planning- Trusts

Terms used:
• Grantor- settlor/ trustor, creates trust, has legal capacity to transfer property
under trust
• Trustee- who derives title to property on behalf of beneficiaries, responsible for
managing property in best interest of beneficiaries, could be grantor also,
accountable
• Beneficiary- person benefiting from trust
• Property- what gets managed by trust, corpus/ principal, can be transferred to
trust during lifetime or after death of grantor
• Living trust and testamentary trust