Advisor’s Role in Retirement Planning
| Heading | Subheading |
|---|---|
| Introduction | |
| Role of Investment Advisor | Understanding Client’s Goals |
| Identifying Financial Assets | |
| Creating Detailed Financial Plan | |
| Knowledge of Taxes & Retirement | |
| Plan Rules | |
| Investment Advisor’s Advice | Employer Benefits |
| Pension Distribution Choices | |
| Suitability of Annuities | |
| Retirement Income Expectations | |
| Withdrawal Rate from Portfolio | |
| Guaranteed Investments | |
| Taxable Income Investments | |
| Restructuring Investments | |
| Paying Off Mortgage | |
| Reverse Mortgage | |
| Life Insurance Policies | |
| Factors Considered by Advisor | Time Horizon |
| Investment Experience | |
| Goals | |
| Investment Risk Tolerance | |
| Current Resources | |
| Optimizing Investment Portfolio |
Calculations for Retirement Planning
Retirement Corpus Required
To estimate the retirement corpus required, one must take into account inflation and the expected standard of living. Below is an estimation of the retirement corpus required for an individual who wishes to retire at the age of 60 and expects to live till the age of 85.
Age at present: 35 years
Expected retirement age: 60 years
Expected life expectancy: 85 years
Assuming the current monthly expenses are Rs 10000:
Monthly expenses after 25 years (at 7% inflation): Rs 54,724
Monthly expenses during retirement (50%-60% of existing expenses): Rs 27,362 – Rs 32,668
Assuming the individual wants to maintain the same standard of living during retirement:
Retirement corpus required: Rs 2.60 crore – Rs 3.11 crore
Subheading: Factors to consider while calculating retirement corpus
Factors that can affect the retirement corpus required include:
- Inflation rate
- Current expenses
- Expected standard of living during retirement
- Expected longevity
- Liabilities and debts
- Medical expenses during retirement
It is important to consider these factors while planning for retirement to ensure a comfortable and financially stable retirement.
Table 1: Retirement Corpus Required
| Monthly Income (Rs) | Monthly Expense (Rs) | Monthly expense for Retirement (60%) (Rs) | Inflation rate p.a. | No. of Years to retire (60-35) | Monthly expense at retirement (Rs) | Life expectancy (yrs) | No. of Years post Retirement (85-60) | Retirement Corpus Required (Rs)*# | |
|---|---|---|---|---|---|---|---|---|---|
| Person 1 | 20,000 | 15,000 | 9,000 | 7% | 25 | 48,847 | 85 | 25 | 1.18 crore |
| Person 2 | 30,000 | 25,000 | 15,000 | 7% | 25 | 81,411 | 85 | 25 | 1.97 crore |
| Person 3 | 50,000 | 40,000 | 24,000 | 7% | 25 | 1,30,258 | 85 | 25 | 3.15 crore |
Table 2: Monthly Savings Required to reach the Corpus
| Retirement Corpus required (Rs) | Age to start Investment (Yrs) | Time horizon of investing till retirement (Yrs)* | Returns Assumed (%) | Monthly Savings required to reach the Corpus (Rs)# | |
|---|---|---|---|---|---|
| Person 1 | 1.18 crore | 30 | 30 | 12 | 3,900 |
| Person 2 | 1.18 crore | 35 | 25 | 12 | 7,000 |
| Person 3 | 1.18 crore | 40 | 20 | 12 | 13,000 |
Note: Retirement age is assumed to be 60.
PMT function in excel has been used to calculate the monthly savings required to reach the corpus. The formula used is PMT(rate, nper, pv, [fv], [type]).
PV function in excel has been used to calculate the Retirement Corpus Required (Rs)*#. The formula used is PV(rate, nper, pmt, [fv], [type]). The assumptions used for the calculation are inflation rate of 6% and return on corpus at 8%.
These tables show the importance of retirement planning and how the delay in planning can impact the savings required for reaching the estimated corpus. It also highlights the impact of inflation on retirement planning and emphasizes the need to start investing early. The tables provide a clear picture of the monthly savings required to reach the desired corpus, based on the assumptions made for the interest rate and time horizon of investing till retirement.
Benefit of Stepping Up Your Investment in Accumulation Years
- Accumulation years are filled with uncertainties.
- Emergencies and liabilities may arise, impacting savings ability and retirement goals.
- Most investments towards retirement are fixed contributions with limited savings.
- Stepping up investments in accumulation years can help avoid shortfalls in retirement savings.
Stepping Up Strategy
- Stepping up contributions periodically with regular payments or a lump sum amount.
- Periodic step-up strategy involves starting with a fixed investment and increasing by a certain percentage every year.
- Stepping up contributions helps in maximizing savings for retirement.
- Can be done through investments in EPF, NPS, or mutual funds.
Investment Options
- Eligible for employer-sponsored plans like EPF, contribute to the maximum amount.
- Aged 50 years and above, consider investing through Voluntary Provident Fund.
- No limit to invest in NPS, invest beyond employer’s contribution through SIP or lump sum contributions.
- Mutual funds offer an option of step-up SIPs, where contributions increase after a specific period, taking into consideration current income, prospective yearly increments, and financial goals.
Benefits of Stepping Up Strategy
- Helps reach required retirement goals with limited resources.
- Stepping up contributions helps in increasing the investment proportionally as income increases, leading to compounding of one’s wealth.
Example
- Mr. A needs to accumulate a retirement corpus of Rs 2.0 crore in 20 years.
- Assuming a rate of return of 12% per annum, he will need a monthly fixed savings of Rs. 22000 to reach the desired goal.
- If he steps up his monthly contributions by 7% annually, the fixed contribution required is Rs 13000, optimizing his savings.
Impact of Pre-Retirement Withdrawals and Benefit of Transferring Retirement Corpus
| Topic | Subtopic | Key Points |
|---|---|---|
| Pre-Retirement Withdrawals | Impact on Retirement Corpus | – EPF withdrawal before retirement impacts the accumulation of the retirement corpus. – It may result in a shortfall in retirement funds, forcing one to work longer or reduce their lifestyle. – Withdrawal from long-term investment, like EPF, can result in a significant loss of interest. – Mr. E may lose Rs. 9 lakhs of interest if he withdraws Rs. 75,000 from his EPF account. |
| Transferring Retirement Corpus | Benefit of Transferring Retirement Corpus from One Employer to Another | – Retirement benefit products provide an excellent product, but switching jobs results in losing benefits. – Having multiple EPF accounts has operational and taxation issues. – EPF can be transferred completely online through UAN, and updating personal details is necessary. – NPS has an easier process of transferring corpus to a new employer. – PRAN under the ‘All Citizens’ model can be continued if the new employer is not a registered entity. |
| Taxability Clause | Taxability of EPF and NPS Corpus | – EPF becomes taxable if withdrawn before five years of continuous service. – The same period with the old employer is added to the service period with the new employer. – The old EPF account must be transferred to the new employer account. – NPS corpus is locked till the age of 60, and only 20% can be withdrawn before the vesting age. |
| Compounding Effect | Benefit of Transferring Retirement Corpus from One Employer to Another | – Corpus lying with the old employer continues to earn interest till the age of 58 years. – EPF provides tax-free returns and compounding interest, making it more beneficial to continue earning on the accumulated corpus. – By transferring the old retirement corpus, one can remain on the same path as planned earlier and reach their desired retirement goals without any major impact on other financial goals. |
Criteria to Evaluate Retirement Benefit Products
| Life Stage | Objective | Evaluation Factors |
|---|---|---|
| Pre-Retirement | Accumulation | 1. Cost 2. Return 3. Risk 4. Tax Efficiency |
| Retirement | Income Generation and Corpus Growth | For Income Generation: 1. Inflation 2. Capital Protection For Corpus Growth: 1. Cost 2. Return 3. Risk 4. Tax Efficiency |
| Post Retirement | Income Generation and Capital Protection | 1. Protection of Capital 2. Low Return with Least Risk 3. Leaving Money for Heirs |
- Pre-Retirement: At this stage, the focus is on accumulation of retirement corpus. Products that allow money to grow even though downside risk may be there are suitable. Products should be evaluated based on cost, return, risk, and tax efficiency.
- Retirement: At this stage, the need will change as there will be a requirement of steady income along with growth of the accumulated corpus. Two types of products will be required – one which can generate income and other which can grow the corpus. Income generating products should be evaluated based on inflation and capital protection, while corpus growth products should be evaluated based on cost, return, risk, and tax efficiency.
- Post Retirement: At this stage, the objective shifts completely to generate the income, as long horizon to grow the money is no more viable. Products should be evaluated based on protection of capital, low return with least risk, and leaving money for heirs where liquidity might be the primary factor.
Philanthropy
Philanthropy refers to the act of donating time, money, or resources to help the needy or promote a social cause. It has become popular globally, not just among the rich and wealthy but also among small income earners who want to contribute to their society.
Reasons for philanthropy:
The disparity between poor and rich is increasing in India, which has the second-largest population in the world. Poverty is on the rise, and the poor are not receiving the required attention. As a result, unless poverty and disabled issues are addressed, it will be challenging for the country to progress. It is important for everyone to contribute to this cause, not just the government.
Philanthropy for Investment Advisers:
For investment advisers, communicating with their clients about their values and passions in life is a meaningful way to strengthen client relationships. It is also a natural way of building clients’ trust in the investment adviser.
Steps for Investment Advisers:
- Starting the conversation: Investment advisers can initiate the conversation with clients by discussing their financial plan and asking about their personal and family values. They can suggest creating a charitable giving plan to address their clients’ social or environmental causes.
- Timing it right: Choosing the right moment to introduce the topic of charitable giving can make the conversation flow easily. Natural situations that could spark a conversation about philanthropy include a liquidity event, drafting or revisiting a will, a life event, or an annual client meeting.
- Following up: After discussing philanthropy with clients, investment advisers should follow up with resources and next steps. This is important since philanthropy can easily fall to the bottom of a busy person’s to-do list.
