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home > Financial Planning > Services > 7 Facets of FP > Retirement Planning
Any individual should never under-estimate retirement savings plans or leave them out of any financial needs analysis. Investor needs to check whether the investments are on track to meet investor's targets at the retirement age investor has set for him/her. Owing to variations in inflation and investment performance, investor will find his/her retirement plans will need constant adjustment. At retirement, focus usually shifts to preservation of capital and maintenance of lifestyle. Expenses are expected to be lower during retirement, but discretionary funds for travel and hobby is often a goal.

The importance of a annuity plan and retirement planning become evident during the retirement stage. Since the time horizon is shorter, lower risk assets are desirable. Recently, some planners have pointed out that for many retired investors, the time horizon may still be 20 or 30 years, highlighting the importance of some growth component in the portfolio. Careful financial planning is still necessary for the retirement stage investor. It is in this stage that many retired individuals may decide to gift their assets. Those who have built family businesses or substantial assets may find it more reassuring to gift assets during their lifetime when the process can be controlled, rather than leaving them as part of an estate.

What is retirement planning?
Retirement planning is a process for determining how much money one will need at the time of retirement. It also helps identify the possible ways to save for retirement according to the present financial situation.

Retirement planning starts with defining ones needs objectives or goals and current situations. Once the goals are established, the financial planner will prepare a broad strategy based on these goals. A comprehensive plan is implemented which takes into account the current needs as well as the retirement objectives.

The three important things here are:
It involves setting realistic objectives for retirement. It is a vision of what the retirement income should be or the standard of living to be maintained.

Financial arrangements:
It talks about the lifestyle one expects to have post retirement. The required arrangements are to be made according to the lifestyle needs.

One has to observe good discipline during the working years in order to achieve the retirement goals.
Why Retirement Planning?
Only one third of the Indian population is working population and that includes the self-employed. Out of these, only 11% have a regular scheme of retirement benefit. The remaining 89% of the working population does not have any organized retirement benefit scheme and a majority of them may not be able to plan for their retirement on their own.

Retirement planning is a very important phase of personal financial planning. It largely depends on the portfolio of savings and investments. Retirement planning is a continuous process and also very personalized as needs differ from individual to individual. In the Indian context, joint family tradition is slowly but surely phasing out, thus making retirement planning a vital part of anyone's life. This is primarily due to change in the life expectancy and also the belief that the best of the years to be spent is the retirement age. It is good to start the retirement planning as early as possible so as to benefit from the power of compounding in the best possible manner. The main reason for retirement planning is to take care of the basic needs and also the medical needs which have become costly over the years. Inflation leads to a rise in prices of goods and services. From a retirement perspective, rising cost of medical services is significant. At that age, people need more medical attention and as years go by, it becomes a challenge to provide for the rising medical costs. And it's not just ones expenses, but that of his/her spouse as well.

As life expectancy increases rising medical costs seem more daunting, especially since you will not have a regular income at that stage. This may seem scary now but if you plan for it, it takes away a lot of uncertainty. Therefore one needs to plan well in advance to cater to these needs. It is never too early to prepare for retirement, especially if one wants to maintain the same standard of living that one would have got accustomed to by then. India does not have state-sponsored social security for the retired people. While one may be entitled to a pension or income during retirement, in the new economic era, he/she is increasingly likely to be responsible for providing for their own needs.
How to plan for retirement?
Retirement goals should be set in a realistic manner. The retirement goals should be reviewed annually by a knowledgeable financial planner. Without planning it is not possible to meet both financial and non-financial goals. Planning allows assessing situations and identifying potential problems. Advanced planning allows improving the situation and helps in dealing the potential problems in an improved manner.

The compulsory savings done for retirement under PF may not be sufficient to cater to all the future needs. The falling interest rates and the sustained increase in the cost of living make it a compelling case for individuals to plan their finances to fund their retired life.
What are the available Investment Avenues?
Pension Plans
These plans of life insurance companies aim to give investors good and effective planning for their retirement. This is to achieve a retirement corpus to suit the future needs of an investor. The tax benefits of these plans are limited to Rs.10, 000 and so does not remain a favored investment avenue. The pension plans invest the amounts into the bonds and government securities thus giving very less returns clubbed with high safety.

This is a good investment avenue for the long term. An individual investing for a long term into equities would definitely earn better returns when compared to debt instruments. The investment into equities can be related to the age of the individual. As the age increases the exposure into equities should decrease as the risk appetite of the individual generally reduces with the growing age. The portfolio should be a good mix of large caps and mid caps thus giving good returns with certain amount of safety attached to the investments.

Mutual Funds
Retirement planning is an exercise that cannot do without equity exposure attached to it. People sometimes are not willing to invest into the equities and so might miss out the growth opportunities in these instruments. The more safer and good way of investing is to take the route of mutual funds. The equity funds are also for the long term and so would ideally suit the retirement needs of an individual. One needs to look for the past track record of these mutual funds before investing into these instruments. In case of a new fund offer the fund manager's past performance and also the AMC's credentials are to be taken into account.

Employee provident fund is a statutory contribution deducted from the employee's salary and the employer also contributes the same amount into the fund. This is a safe investment avenue and gets around 8.5% tax free returns at present. EPF is eligible for deduction under section 80 c. Interest earned is tax free in this fund.

Public Provident Fund is a small savings scheme which is a safe investment option giving around 8% and has tenure of above 15 years. The interest earned is totally tax free.

National Savings Certificate
NSC is another attractive instrument offering a return of 8% pa. Investors are required to make a single deposit and the interest component is returned along with the principal amount on maturity. NSC has an edge over PPF on account of a relatively lower tenure, i.e. 6 years.

Post Office Monthly Income Scheme (POMIS)
This scheme provides monthly income (at 8% pa) to investors. On competition of 6 years, a 10% bonus on the principal sum is provided. It offers investors an exit option after 1 year from the investment date. However the catch lies in penalty clause. An exit after 1 year would also entail a loss of 5% of the amount invested. As a result, while the investor would not suffer any loss in interest earnings, but the loss of principal can be a significant one (especially for investors with high investments). Investors have to wait for a 3 year period if they wish to liquidate their holdings without any loss of principal.

POMIS is best suited for investors like retirees who are looking for regular returns. The combination of assured returns with tax benefits makes POMIS an attractive proposition.

Senior Citizens Savings Scheme (SCSS)
This scheme has been reserved for citizens above 60 years of age, albeit citizens above 55 years can invest in the same subject to certain conditions being fulfilled. SCSS offers a return of 9% pa, making it a must have proposition for the target audience. The minimum investment amount is Rs. 1,000 while the upper limit has been capped at Rs. 1,500,000. The SCSS along with the POMIS can prove to be a very good option for senior citizens who need regular income without taking on any risk. The main objective of the scheme is to provide a relief to the senior citizens and to check the further decline in their interest income. With a Government of India-backing, your principal is as assured as it is in any other post office account. With backing from the Government of India, your interest income from scheme is assured.

The scheme can be extended up to 3 yrs after maturity. The account can be opened by single individual who has attained the age of 55 years or above and the joint account can be opened in the name of spouse only. The NRI and HUF accounts are not permissible in this scheme.
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