Are You Trying to Do Your Retirement Planning?

Retirement planning aint’ easy. You need to make the following assumptions.

• Correct estimation of how long you are going to live. Even though we can assume the life expectancy of 25.2 years according to LIC mortality tables, there’s the fine print where it says that 50% of people will live past this age!

• Correct estimation of inflation in the distant future. Inflation goes up and down, that we know. When, we don’t know.

• Correct estimation of future expenses. We are not aware of the inflation, the basic assumption for calculating the future expenses, nor can we factor other things that may come up from time to time.

• Correct provision for health insurance. Can you predict what will ail you in the future? Maybe you can, do you?

• Correct estimation of future taxes. With the tax code being rolled out and then rolled back, you do not really know what will be the tax code when you retire.

That’s why most people phase out when they come up with planning for their retirement.

Having scared you enough, I must point out that the assumptions need not be accurate. Look at the numbers as you compass or a tool that tells you whether you are going in the right direction.

It’s more important to get started rather than die of analysis paralysis.

Are you ready to grapple with such financial decisions? After all, it’s your money, your life and your future!

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Who Does Your Retirement Planning For You

If you have a government job or work in some of the PSUs where you get a pension after retirement, you’re one lucky soul who has his/her retirement planning done even without your intervention. Moreover in most cases, it is a defined benefit (DB) plan which depends on your length of service and is indexed to the WPI.

With the NPS, now the DB plan is being shifted to the defined contribution plan (DC).

A Research paper says that an employer can significantly influence its employees’ choice of a pension plan by setting its default plan. But what happens when you are responsible for making all investment decisions for your retirement planning goal?

Research Paper on Retirement Selection by Gopi Shah Goda and Colleen Flaherty Manchester. Excerpts:

Over the past 30 years, corporate retirement plan offerings have been shifting from defined benefit (DB) plans to defined contribution (DC) plans. The DB plans provide retirement benefits through a set formula based on earnings and years of service to one company, but they also carry the risk of the employer defaulting on part of the pension obligation in the future or of the employee leaving the firm before reaching its designated retirement age. The DC plans provide benefits based on tax-advantaged contributions and subsequent investment performance, but they put the responsibility of enrollment, contribution, and investment decisions on the individual. Because DB and DC plans differ in their accrual patterns and risk characteristics, deciding which plan is best for an individual can be difficult.

Many employers who have been making the transition to DC plans still have their pre-existing DB plans, so in some instances they continue to offer employees a choice between the two. However, some of those employees fail to make a decision by enrollment deadlines. In Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection (NBER Working Paper No. 16099), co-authors Gopi Shah Goda and Colleen Flaherty Manchester analyze the effect of incorporating differences among individuals into the default rules governing retirement plan selection.

Their data come from a large non-profit employer that in 2002 offered 925 of its union employees the option of switching from their existing DB plan to a DC plan. The employees, whose average age was 46, were given six months to decide. If they failed to make a choice, they were defaulted into a plan based on their age: those under age 45 were assigned to the DC plan while those 45 and older were kept in the DB plan. Of the employees eligible for the transition, just under half made an active choice and 70 percent of that group mimicked the company’s default rule — that is consistent with employee choices seen in similar default option circumstances.

The results of this study suggest that an employer can significantly influence its employees’ choice of a pension plan by setting its default plan. In this instance, the employees who were subject to a DC plan default were 60 percentage points more likely to enroll in a DC plan than a DB plan. “The default was an overwhelming determinant of plan enrollment,” the authors conclude.

These researchers also examine what age-based default rule employers should select for pension plans if their goal is to maximize the aggregate risk-adjusted pension wealth of their workers. The rule will depend on employees’ risk aversion as well as on the plans’ characteristics. For example, the asset allocation strategy in the DC plan is important. When risk aversion is high, perhaps in volatile economic periods, the DB plan generally will be valued highly by more employees, which will translate into a decline in the optimal age at which the employer will set a default of DC participation.

My takeaway from the above research is that we leave it to others for such an important decision. Yes, there’s a bit of jargon that we need to struggle with. But after all, it’s our retirement and not the guy who decides it for you!

Question to ask yourself: Who does your retirement planning (And other financial) decisions for you?

Retirement Planning: How to Do It Yourself!

Deepak Shenoy has a lucid explanation of an Insurer’s Pension Plan and how it compares with a simple low cost ETF.

Deepak explains how despite assuming a lower rate of return (9% instead of the 10% assumed by the Insurer), you can outperform the Insurer’s Pension Plan by a wide margin.

I am sure, comparing the Insurer Pension Plan with NPS (New Pension Scheme) will show similar results.

Btw, figuring out the numbers for your retirement plan is another big issue. Start with figuring out your retirement funds, how much every month will you need after factoring inflation and how long will the funds keep going. (you may like to spend time with this retirement plannerthese sheets and calculators)

India’s First Online Weekly on Personal Finance

Personal Finance 201, the website, is back in action.

Check out the two articles posted this week:

  1. Riders: Top up your Policy at Low Cost
  2. Retire From Work, Not From Life

The two articles are written by Gopal Gidwani. He can be contacted at gopal_gidwani@yahoo.com for any queries on Financial Planning, Tax Planning and Investments. He is an qualified Associate Financial Planner (AFP) in Investment Planning, Tax Planning, Insurance Planning and Retirement Planning.

Do you want to write? Or share your personal finance experiences? Let me know.

Financial Planning Workshop

While attending a workshop for Trainers, I remembered that I have been planning a “Personal Finance Workshop” for quite some time. I have been telling myself that one should “Do it well, or don’t do it”. The result: no progress!

Let me list out the workshop objectives and the things that I want to cover in the workshop to get me re-started on this job.

Workshop Objective:

The workshops will help the households to make better financial decisions and avoid common financial mistakes

Workshop Contents:

  1. What is Personal Finance? Part 2, Part 3
  2. Expectations of the Participants.
  3. Overview of Financial Products.
  4. Financial Goals.
  5. Magic of Compounding.
  6. Rupee Cost Averaging.
  7. Playing with Numbers. Fear of Numbers
  8. Personal Spending Plan.
  9. Insurance Cover
  10. Mutual Funds/ETF
  11. Stocks
  12. Real Estate Planning
  13. Credit Cards
  14. Documentation/Legal Aspects(Wills)/
  15. Planning for your Children
  16. Retirement Planning
  17. Scheduling a Money Day
  18. Tax Planning

Pretty long list! Do you want to add anything more? Atleast it gives you a sense that personal finance is a pretty serious thing!! :)

Where to Invest for Retirement Planning?

What is the best retirement plan where we can invest? Alas, this simple question does not have a one line answer!

Moreover, if we really want to plan for our retirement >20 years from now, it’s a good idea to spend an hour or so rather than come to a hasty decision. In fact when you are planning for retirement, you are also, in a single stroke, managing your personal finance. Because retirement investments takes into account your financial goals, income, spending and savings. So it is a good idea to spend some quality time on this.

So, let’s start with figuring out your retirement funds, how much every month will you need after factoring inflation and how long will the funds keep going.
(you may like to spend time with this retirement planner, these sheets and calculators)

After you have an idea about your retirement needs, you also figure out how much to invest. And depending on what your income is, you make the decision for savings too. So, in a way, your retirement planning is a complete management of your money too!

Now it’s time to weigh the various options available. The common investments options are:

  1. Pension products from Insurance companies,
  2. Mutual Funds and
  3. Post Office investments.
  4. PPF.

Before we proceed, it’s important to consider three out of four parameters of investing. i.e. 1) Growth, 2) Security and 3) Expenses (leaving out liquidity, which has to come much later!)

The pension products from the Insurance companies have a high cost structure as they pay a decent amount to their Agents. The Insurance companies have to follow guidelines from IRDA to invest your money which is generally in safe investments (Other than ULIPS where investor bear the investment risk). This affects the returns and the average return can be pegged at around 6% as of now.

ULIP Pension products can give higher returns though the investor bears that risk. But the cost structure of ULIP pension funds is higher than Mutual Funds.

Mutual Funds offer better returns and again they are subject to market risks. But over a long time frame, the returns are really good.

Post Office monthly accounts offer interest @ 8% per annum, payable monthly.

Now, coming back to the question about the best retirement plan, the answer would be a combination of the following products:

Mutual Funds, Public Provident Fund, fixed deposit (FD) and fixed maturity plan (FMP), etc to build the retirement fund while you are young and can take risks.

As the fund grows, the investments can be deployed in avenues like FDs, senior citizens scheme, Post Office Monthly Income Scheme, MF investments with a systematic withdrawal option, FMPs in the dividend distribution mode and monthly income plans, etc to get periodic returns.

Essentially it’s like bat like Sehwag first and then let Sachin take you to the winning post!


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