Introduction to Retirement

Planning, Purpose & Need,

Life Cycle Planning
UNIT- 4
Meaning
• Retirement planning is the process of determining retirement
income goals, and the actions and decisions necessary to achieve
those goals.
• Retirement planning includes identifying sources of income, sizing
up expenses, implementing a savings program, and managing assets
and risk. Future cash flows are estimated to gauge whether the
retirement income goal will be achieved.
• Some retirement plans change depending on whether you're in, say,
India, United States or Australia.
• Retirement planning is the process of setting retirement income
goals and the actions and decisions necessary to achieve those goals.
• Retirement planning includes identifying sources of income,
estimating expenses, implementing a savings program, and
managing assets and risk. Retirement planning is ideally a life-long
process.
• You can start at any time, but it works best if you factor it into your
financial planning from the beginning.
• That's the best way to ensure a safe, secure and fun retirement.
The fun part is why it makes sense to pay attention to the serious
and perhaps boring part: planning how you'll get there.
Purpose
• Money works for you In the younger days, everyone runs after
their 9-5 jobs. Everyone works to earn money and have a good
living.
• However, retirement days are the days where one cannot work any
longer. Therefore, it is the time when the money one earned
should do all the work.
Stress-free life
• This is the most significant outcome of retirement planning. Retirement
planning helps to lead a peaceful and stress-free life. With having investments
that earn regular income during retirement leads to a worry-free life.
• Retirement is the age where one has to relax and reap the benefits of all the
hard work. Inflation beating returns Investing in retirement will help in
earning inflation-beating returns.
• Holding money in a bank savings account will not generate high returns. In
other words, the interest earned will not be enough to lead an
uncompromised retirement.
• Therefore, proper investment planning will help one to generate significant
returns in the long term. Also, it is important to start investing early. This
helps in averaging out the impact of market volatility.
Cost-saving
• Planning for retirement at a young age will help in reducing the
cost.
For example, in an insurance policy the premium amount to be
paid will be lesser when the policyholder is younger. While getting
insurance during retirement becomes costly. Need Best time to fulfil
life aspirations. One cannot work forever. Start planning early and
diversify investments.
• The average life expectancy is increasing.. Relying on one source of
income is risky, e.g., pension. Do not depend on children.. Higher
complications, e.g., medical emergencies. Contribute to the family
even during retirement.
Life cycle Planning
Stages of Retirement Planning:
1. Young Adulthood: Those who are entering an adult life may not have a lot of
money to invest, but they can have enough time to let investments mature. It
makes a critical and valuable piece of retirement saving. Such investments can
make up a large piece of investments with regards to the principle of
compound interest. Compound interest allows interest to be calculated on
interest the more time you have, the more interest you will earn.
2. Early midlife: This age can bring in a lot of financial stress in terms of
mortgages, student loans, and insurance premiums. Therefore, it may be
difficult to save in this period.
3. Later midlife: When time is running out to make up for the difference in the
actual savings and retirement plans, you will have the last opportunity to fill
the gap. Since you will have higher wages and most of your debts would be
fulfilled, you can have a larger sum available for investment.
• The level of emphasis on retirement planning varies throughout
different life stages. During the youth, retirement planning only
means setting aside enough funds for retirement.
• During the middle of the career, it might change to setting specific
income/asset targets and taking the necessary steps to realize
them. once you reach retirement, decades of savings will pay out.
Pension Schemes
• Pension plans are a good way to secure your finances post-
retirement. In India, there are several pensions plans available,
and you can choose to invest in the one that you are most
comfortable with.
• Pension plans provide financial security and stability during old
age when people don't have a regular source of income.
Retirement plan ensures that people live with pride and without
compromising on their standard of living during advancing years.
• Pension scheme gives an opportunity to invest and accumulate
savings and get lump sum amount as regular income through
annuity plan on retirement.
• According to United Nations Population Division World’s life
expectancy is expected to reach 75 years by2050 from present
level of 65 years. The better health and sanitation conditions in
India have increased the life span. As a result number of post-
retirement years increases.
• Thus, rising cost of living, inflation and life expectancy make
retirement planning essential part of today's life. To provide social
security to more citizens the Government of India has started the
National Pension System.
There are different kinds of pension plans which you can check
below:
Plans that are sponsored by an insurer where the investment is
solely in debt and are best suited for conservative investors. Plans
that are unit-linked and invest in both equity and debt.
 The National Pension Scheme, which invests either 100% in
government securities, 100% indebt securities (other than
government securities), or a maximum of 75% in equity.
Schemes
1. Life Annuity :These schemes pay an amount called annuity to the
retire for their lifetime. If the annuitant dies and chooses the option
with spouse, then the spouse receives the pension amount.
2. Annuity certain: In this scheme, the annuitant is paid the annuity
for a certain number of years. The annuitant can pick this period, and
in case of their death, the beneficiary receives the annuity.
3. Pension Plans with and without cover : Pension plans with cover
include life cover, which means that if the policyholder dies, the family
members are paid a lump sum. This amount may not be considerable.
The without-cover plan, as the names suggests, does not have life
cover. If the policyholder passes away, then the nominee gets the
corpus. At present, the immediate annuity plans are without
protection, while the deferred plans are with cover
4. Guaranteed Period Annuity: Regardless of whether the holder
survives the duration, this annuity option is given for periods such
as five years, ten, fifteen, and twenty years.
5. Immediate Annuity: In this type of scheme, the pension begins
right away. As soon as you deposit a lump sum amount, your
pension starts. This is based on the amount the policyholder invests.
You can choose from a range of annuity options. Under the Income
Tax Act of 1961, the premiums of the immediate annuity plans are
tax exempt. Post the death of the policyholder, it is the nominee who
is entitled to the money.
6. National Pension Scheme The Government of India introduced a
pension scheme in 2004 for those wh0 wanted to build up their
pension amount.
• Your savings will be invested in the debt and equity markets, based
on your preference. It allows you to withdraw 60% of the funds at
the time of retirement, and the remaining 40% goes towards
purchasing an annuity plan.
• Pension Funds The government body, Pension Fund Regulatory
and Development Authority (PFRDA), has authorised six
companies to operate as fund managers. These plans offer
comparatively better returns at the time of maturity and remain in
force for a substantial amount of time.
Deferred Annuity
• With a deferred annuity plan, you can accumulate a corpus
through a single premium or regular premiums over the policy
term. The pension begins once the policy term gets over.
• This deferred annuity plan has tax benefits wherein no tax is
charged on the money invested until you plan to withdraw it. This
scheme can be bought by either making regular contributions or
by a one-time payment.
• This way, it works for you whether you want to invest the entire
amount at one time or want to invest systematically.
Defined Benefit pension plans
• A defined-benefit plan is an employer-sponsored retirement plan where
employee benefits are compute during a formula that considers several
factors, such as length of employment and salary history.
• The company is responsible for managing the plan's investments and risk
and will usually hire an outside investment manager to do this. Typically,
an employee cannot just withdraw funds as with a 401(k) plan.
• Rather they become eligible to take their benefit as a lifetime annuity or
in some cases as a lumpsum at an age defined by the plan's rules.
Planning for retirement is a crucial aspect of everybody's lives.
• Considering the rising inflation level and limited social security initiatives
for senior citizens, it is vital that you start planning your retirement early.
Annuity vs. Lump-Sum Payments
• Payment options commonly include a single-life annuity, which
provides a fixed monthly benefit until death; a qualified joint and
survivor annuity, which offers a fixed monthly benefit until death
and allows the surviving spouse to continue receiving benefits
thereafter; or a lump-sum payment, which pays the entire value of
the plan in a single payment.
• Working an additional year increases the employee's benefits, as it
increases the years of service used in the benefit formula. This
extra year may also increase the final salary the employer uses to
calculate the benefit. 1n addition, there may be a stipulation that
says working past the plan's normal retirement age automatically
increases an employee's benefits,
Annuities, Types of Annuities
• One of the reasons annuities have so many different features is that they
are actually contracts between an annuity holder also known as an
annuitant and an insurance company.
• Contracts have different provisions, different costs, different payouts, etc.
The upside is an annuity can be personalized to fit your needs. The
downside is the vast array of options can seem over whelming to
potential annuitants.
• Annuities are contracts issued and distributed (or sold) by financial
institutions where the funds are invested with the goal of paying out a
fixed income stream later on. They are mainly used for retirement
purposes and help individuals address the risk of outliving their savings.
• Upon annuitization, the holding institution will issue a stream of
payments at a later point in time. Fixed, variable and fixed indexed
are the main types of annuities.
• Knowing what level of risk you’re comfortable with will help guide
you through your annuity choices. Interest-rate risk is a factor in
determining the calculation of your payments. Low risk yields
predictable payment amounts. Higher risk could boost your
expectations.
Fixed Annuity
• This is the option with the least risk and the most predictability. Fixed
annuities come with a guaranteed, set interest rate that doesn't vary
beyond the terms of the contract.
• While other investments night soarer dive, the fixed annuity is steady.
Sometimes, however, the interest rate will reset after a predetermined
number of years.
• Types of fixed annuities
1. An equity-indexed annuity is a type of fixed annuity, but looks like a
hybrid. It credits a minimum rate of interest, just as a fixed annuity
does, but its value is also based on the performance of a specified
stock index usually computed as a fraction of that index's total
return.
2. A market-value-adjusted annuity is one that combines two
desirable features the ability to select and fix the time period and
interest rate over which your annuity will grow, and the flexibility to
withdraw money from the annuity before the end of the time period
selected. This withdrawal flexibility is achieved by adjusting the
annuity's value, up or down, to reflect the change in the interest rate
market" (that is, the general level of interest rates) from the start of
the selected time period to the time of withdrawal.
Variable Annuity
• A variable annuity comes with more risks and potentially higher
rewards. The interest rate of variable annuities is tied to an
investment portfolio.
• Payments from variable annuities can increase if the portfolio does
well, but they can also decrease if the investments lose money.
With a variable annuity, the insurer invests in a portfolio of mutual
funds chosen by the buyer.
• The performance of those funds will determine how the account
grows and how large a payout the buyer will eventually receive.
Variable annuity payouts can either be fixed or vary along with the
account’s performance.
• People who choose variable annuities are willing to take on some
degree of risk in the hope of generating bigger profits.
• Variable annuities are generally best for experienced investors,
who are familiar with the different types of mutual funds and the
risks they involve.
Pre & Post-Retirement Strategies
• The most important part of Retirement planning is Investing'. Investing
for retirement has to be very effective. There are several investment
avenues that you can opt for retirement planning. You have spent years
accumulating your retirement fund. What is the best way to draw it
down. Your retirement fund may consist of a collection of the following:
1. Company Pensions
2. AVC
3. Deferred pensions
4. Paid up pensions
5. Retirement Bonds
• Pre Exchange Traded Funds (ETES):
Exchange traded funds are considered to be one of the popular
securities amongst investors.
An Exchange Traded Fund (ETF) is a type of investment that is
bought and sold on stock exchanges. It holds assets like
commodities, bonds, or stocks.
An exchange traded fund is like a mutual fund, but unlike a
Mutual Fund, ETFs can be sold at any time during the trading
period. Moreover, ETFS helps you to build a diverse portfolio.
• Bonds:
Bonds are one of the most popular retirement investment
options. A bond is a debt security where the buyer/holder initially
pays the principal amount for buying the bond from the issuer.
The issuer of the bond then pays the holder an interest at regular
intervals and also pays the principal amount at the maturity date.
Some of the bonds provide good 10-20%o p.a.-rate of interest. Also,
there is no tax applicable on bonds at the time of investment.
• Real Estate:
It's the most preferred retirement investment options amongst
investors. It is an investment made in the real estate, i.e.
house/shop/site, etc.
It's considered to give good stable returns. To make an investment
in real estate, one should consider good location as the key point.
Equity Funds An equity fund is a type of Mutual Fund that invests
mainly in stocks. Equity represents ownership in firms (publicly or
privately traded) and the aim of the stock ownership is to participate
in the growth of the business over a period of time.
The wealth you invest in Equity Funds is regulated by SEBI and
they frame policies & norms to ensure that the investor's money is
safe. As equities are ideal for long-term investments, it is one of the
best retirement investment options.
New Pension Scheme (NPS)
• New Pension Scheme is gaining popularity in India as one of the
best retirement investment options.
• NPS is open to all but, is mandatory for all government employees.
An investor can deposit a minimum of INR 500 per month or INR
6000 yearly, making it as the most convenient for Indian citizens.
• Investors can consider NPS as a good idea for their retirement
planning because there is no direct tax exemption during the time
of withdrawal as the amount is tax- free as per Income Tax Act,
1961.
• This scheme is a risk-free investment as it's backed by the
Government of India.
Post
• Bank Fixed Deposits:
Most people consider the Fixed Deposit investment as a part of
their retirement investment options because it enables money to be
deposited with banks for a fixed maturity period, ranging from 15
days to five years (& above) and it allows to earn a higher rate of
interest than other conventional Savings Account.
During the time of maturity, the investor receives a return which
is equal to the principal and also the interest earned over the
duration of the fixed deposit.
• Reverse Mortgage :
As a part of the post- retirement investment options, a reverse
mortgage is a good option for senior citizens who need a steady flow
of income.
In a reverse mortgage, stable money is generated from the
lender in lieu of the mortgage on their homes. Any house owner
who is 60 years of age(and above) is eligible for this.
Retired people can live in their property and receive regular
payments, until the death. The money receivable from the Bank will
depend on the valuation of property, its current price and well as
the condition of the property .
• Annuity
An annuity is an agreement aimed at generating steady income during
retirement.
Where a lump Sum payment is made by an investor to obtain a certain
amount instantly or in future.
The minimum age entry for any investor in this scheme is 40 years and
the maximum is up to 100 years.
• Senior Citizen Saving Schemes (SCSS): As part of the post- retirement
investment options, an SCSS is designed for retired people who are above
60 years old.
SCSS is available through certified banks as well as the network post
offices spread across India. This scheme (or SCSS account) is up to five years,
but, upon the maturity, it can be subsequently extended for an additional
three years. With this investment, tax exemption is eligible under Section
80C.
Employee stock ownership Plan(ESOP)
• An ESOP (Employee stock ownership plan) refers to an employee
benefit plan which offers employees an ownership interest in the
organization.
• Employee stock ownership plans are issued as direct stock, profit-
sharing plans or bonuses, and the employer has the sole discretion
in deciding who could avail of these options.
• However, Employee stock ownership plans are just options that
could be purchased at a specified price before the exercise date.
• There are defined rules and regulations laid out in the Companies
Rules which employers need to follow for granting of Employee
stock ownership plans to their employees.
Employee Stock Purchase plan
• An employee stock purchase plan (ESPP) refers to a stock program
that allows participating employees to purchase their
organization's stock at a discounted price.
• In some cases, organizations offer stock discounts as high as 15%
Rather than directly purchasing their organization's stock,
participating employees contribute to their plan through automatic
payroll deduction.