BlogNISM Series XB Investment Advi...Chapter 4: Retirement Planning...

Chapter 4: Retirement Planning Basics

Need for Retirement Planning:

  • Retirement planning is essential due to the increase in life expectancy.
  • Life expectancy is the number of years an individual is expected to live.
  • It is difficult to estimate accurately and is dependent on various factors such as health condition, scientific advancements, etc.
  • With the increase in average life expectancy, retirement planning is needed to sustain expenses post-retirement.
  • Retirement planning is not only about money accumulation but living a life of one’s choice post-retirement.
  • The biggest roadblock for retirement planning is accumulating enough money at retirement.
  • Retirement planning has various phases: preparation stage, period of initial retirement/pre-retirement stage, and final retirement.
  • Retirement planning is important regardless of what stage of life one is in.
  • Retirement planning should start early to take steps towards the retirement income one wants.

Retirement Planning:

Retirement planning is the process of determining the income required to meet living expenses in the period when there is no income being earned from employment, and then planning how to accumulate the corpus required and use it to generate the income.

  1. Determine expenses in retirement:
  • Housing (including utilities, maintenance cost, taxes)
  • Living expenses (food and personal upkeep)
  • Medical care
  • Transportation
  • Recreational expenses
  • Insurance (life, health, disability)
  • Taxes

2. Determine income requirement in retirement:

  • Maintain standard of living in retired life
  • Consider expenses to be incurred in retirement
  • Take into account inflation rates

3. Time horizon:

  • Years to retirement: The period from the current point in time to the year of retirement or the period between current age and retirement age
  • Years in/during retirement: The number of years from the beginning of retirement to the end of life for which an income has to be secured

4. Determine the retirement corpus:

  • Variables considered:
    • The periodic income required
    • The expected rate of inflation
    • The rate of return expected to be generated by the corpus
    • The period of retirement, i.e. the period for which income has to be provided by the corpus

Impact of inflation:

  • Inflation eats away the purchasing power of money over time
  • At the time of calculating the income required, the value of the current expenses has to be adjusted for inflation to arrive at the cost of the expense at the time of retirement
  • The income required to meet the same level of expenses during retirement would go up due to inflation, which has to be considered while calculating the retirement corpus

Note: Retirement planning is important to secure one’s financial future during the post-retirement phase. It is important to determine the retirement goal with adequate rigour and periodically monitor and incorporate changes, if any, into the goal. The retirement corpus has to be calculated taking into account the variables mentioned above. Inflation is an important factor that affects retirement planning and has to be considered while determining the retirement corpus.

Estimating Retirement Corpus

Estimating retirement corpus involves determining the income required post-retirement to maintain one’s standard of living. There are two methods to estimate retirement corpus: Replacement Ratio Method and Expense Protection Method.

  1. Replacement Ratio Method
    The replacement ratio method assumes that an individual’s standard of living remains the same before and after retirement. This method helps to define the target income more accurately. The replacement income is calculated based on the pre-retirement income and the assumed replacement ratio.

Replacement Income (Year 1) = Pre-retirement Income * Replacement Ratio
Replacement Income (each subsequent years) = Pre-retirement Income * Annual rate of Inflation * Replacement Ratio


  • The longer the period of retirement, the less accurate the income replacement estimate becomes.
  • Speculation is involved in estimating future retirement expenses.

2. Expense Protection Method
The expense protection method determines the retirement income based on an individual’s retirement expenses. This method involves tracking monthly expenses to estimate the retirement corpus accurately.

Retirement Income = Retirement Expenses / (1 – Tax Rate)


  • Estimation of future retirement expenses becomes difficult with a longer period to retire.
  • Speculation is involved in estimating future retirement expenses.

Employee Benefits and Superannuation Benefits:

Employee benefits refer to non-wage compensation provided to employees in addition to their regular salary or wages. These benefits can take many forms and may include insurance, retirement benefits, leave policies, and other perks. Superannuation is a specific type of employee benefit that is designed to provide retirement income for employees.


Superannuation is a type of pension program established by an employer to provide retirement income for employees. These programs are also known as company pension plans. Funds are deposited into a superannuation account and typically grow without tax implications until the employee retires or withdraws the funds.

Employers have a legal liability to meet the superannuation benefits they have promised to their employees. In India, there is no legislation providing statutory superannuation benefits except to those employees covered under the Employees’ Pension Scheme, 1995. Therefore, employers can arrange for superannuation benefits either through payment or through a trust.

Payment by the Employer

Employers can arrange to pay superannuation benefits to their employees through two methods:

  1. Lump sum contribution: Employers can choose to arrange for superannuation benefits for one or a few employees as a reward for their dedicated services by paying a lump sum contribution out of current revenue to buy an immediate annuity from a Life Insurance Company.
  2. Pensionary benefits: Employers can establish a superannuation scheme for their employees and pay pensionary benefits out of current revenue. However, this method is not satisfactory as it depends on the financial health of the employer, and the likelihood of payment of pension to retired employees may be in jeopardy if the employer does not make enough profits in a given year to pay the pension disbursements.

Funding through a Superannuation Trust

The second method for administering a superannuation scheme is to do it through a trust. The employer should create an irrevocable trust for funding the pension liability and appoint trustees for the purpose. The employer should transfer the contributions for the superannuation benefit (both that of the employer and employees, if the scheme were to be contributory) to the trust fund.

Approved Superannuation Funds

Employers can get tax exemptions for contributions made to approved superannuation funds. These funds must be approved by the Commissioner of Income Tax in order to receive tax exemptions. Once the fund is approved, employers can treat the contributions made to the fund within the limits prescribed in the Income Tax Act as business expenses and deduct them from profits made for income tax purposes.



Mock Tests-

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Investment Advisor Level 2

Chapter 4: Retirement Planning Basics

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1. What is the trade-off between expected rate of return and risk in retirement planning?

2 / 59

2. What are the different phases/stages of retirement planning?

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3. What is the purpose of Section 88(2)(vii) of the Income Tax Act?

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4. Which section of the Income Tax Act provides the tax exemption for payments from an approved superannuation fund upon the death of a beneficiary?

5 / 59

5. Which method assumes that the standard of living remains the same in retirement?

6 / 59

6. What are the two arrangements an employer can have for providing superannuation benefits?

7 / 59

7. What are some expenses that tend to reduce during retirement?

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8. How do trustees ensure pension benefits for employees or beneficiaries?

9 / 59

9. What is the biggest roadblock for retirement planning?

10 / 59

10. What is the Expense Protection Method based on?

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11. What are some responsibilities of the trustees of an approved Superannuation Trust Fund?

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12. What variables are considered in calculating the retirement corpus?

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13. Why is it challenging to plan for retirement compared to other financial goals?

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14. What happens to tax liabilities just after retirement?

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15. Which section of the Income Tax Act provides tax exemptions for income received by trustees on behalf of an approved superannuation fund?

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16. Which expenses tend to reduce at the retirement stage?

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17. What is the benefit of an approved superannuation fund in terms of tax exemptions?

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18. How does the real rate of return impact retirement savings?

19 / 59

19. What is the purpose of establishing a superannuation trust for funding pension liability?

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20. What is a limitation of the Income Replacement Ratio method?

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21. What are some expenses that may increase during retirement?

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22. How do funds deposited in a superannuation account typically grow?

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23. What should be periodically reviewed when using the Expense Protection Method?

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24. According to the Accounting Standard 15 in India, how should retirement benefits be accounted for?

25 / 59

25. What are the two methods used to estimate retirement income?

26 / 59

26. Which factor has led to the need for retirement planning?

27 / 59

27. How does inflation impact retirement planning?

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28. What factors can lead to a reduction in retirement income?

29 / 59

29. What income received by trustees on behalf of an approved superannuation fund is exempt from income tax?

30 / 59

30. How does the expected rate of return and inflation interact in retirement planning?

31 / 59

31. What is the drawback of the employer paying superannuation benefits directly from the current revenue?

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32. How does inflation affect the cost of expenses in retirement?

33 / 59

33. What are some factors that have made retirement planning more critical than before?

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34. Why is retirement planning important at a younger age?

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35. In which situation does an employer pay a lump sum contribution for superannuation benefits?

36 / 59

36. What impact does the expected rate of return have on retirement planning?

37 / 59

37. What is superannuation in the context of employee benefits?

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38. What is an approved superannuation fund in terms of tax exemptions?

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39. What is the purpose of preparing annual accounts for an approved Superannuation Trust?

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40. What are the benefits of an approved superannuation fund under the Income Tax Act? (Choose all that apply.)

41 / 59

41. What is the real rate of return in retirement planning?

42 / 59

42. Why is the time horizon important in retirement planning?

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43. How does inflation impact the retirement corpus?

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44. How is the replacement income calculated using the Replacement Ratio Method?

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45. What is the relationship between early calculation and interest rate in retirement planning?

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46. What does the replacement income increase by each year in the Replacement Ratio Method?

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47. What is the first step in retirement planning process?

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48. What are the responsibilities of the trustees of an approved Superannuation Trust Fund? (Choose all that apply.)

49 / 59

49. What is the role of years in/during retirement in retirement planning?

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50. In India, which employees are covered under the Employees' Pension Scheme?

51 / 59

51. What is the relationship between the expected rate of return and the required retirement corpus?

52 / 59

52. What is another term used to describe a superannuation program?

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53. What happens to the required income in retirement due to inflation?

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54. How can the total retirement expense be calculated using the Expense Protection Method?

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55. Which section of the Income Tax Act allows employers to deduct contributions made towards an approved superannuation fund?

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56. Which method accounts for the increase in expenses and reduction in income during retirement?

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57. What is a drawback of the expense method for those who are many years away from retirement?

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58. What are trustees required to do regarding tax deductions from annuity payments?

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59. What is the liability of an employer once a superannuation benefit is in place?

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