PFRDA

Financial Planning and Retirement Planning

Financial Planning is the process of meeting your life goals through the proper management of your finances (Source-FPSB India). This involves a gamut of activities like tax planning, insurance & risk planning, asset planning, estate planning and retirement planning.

In a nutshell, retirement planning involves actions and decisions necessary towards formation of a corpus for sustenance in post work life. Retirement Planning is process of determining 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.

Need for Retirement Planning

The concept of retirement in India has undergone a paradigm shift in the last couple of years. Retirement opens a whole new chapter for many individuals, when they pursue the ‘work they love to do’ and convert their hobbies to professions.

Increase in life expectancy: Our generation will live longer than previous ones due to improved medical and healthcare, implying the need to gather enough funds that can sustain longer life. This also implies that the healthcare needs and expenses are likely to haunt us.
Shortfall in Employer Funded Pension/Pension Funds: The employer or government funded pension schemes are less likely to sustain the income needs post retirement. The pension that one may receive from these schemes will not be sufficient to maintain the lifestyle. This is the reason many individuals worldwide supplement their state or employer funded retirement plans with self-funding- i.e. pension plans.
Change of social and family structures: In spite of family support, many retirees don’t prefer depending on the relatives or children for meeting post retirement expenses. Maintaining independent lifestyle is sustainable only when backed with a financial cushion.
Lack of social security system: There is no social security system in our country. Hence one has to plan to build the entire corpus to help meet the regular income or any contingency post retire.

(Also read- Ten Retirement Planning Myths and Mistakes that You need to avoid)

Financial concepts associated with retirement planning

Inflation and Time Value of Money

Both are connected and taken together have a deep impact since of all the financial plans, retirement is one plan which very long term in nature, approx. 15-20 years in future. Hence, the investor has to understand that he/she has to understand that while planning for any absolute amounts of corpus the effect of time value of money and impact of inflation are accounted for.

Effect of Compounding

For a long term plan like retirement the amounts need to be left to grow over long periods to let the power of compounding come into force. The early start to saving for retirement will benefit from compounding over the long investment period.

Market Linked Returns Vs Fixed Returns

As the name suggests, the market linked returns are the ones where the returns and earnings are linked to some instrument and the performance of the issuer of such instrument. Unlike fixed return investments, the past history and the expected future performance have a bearing on the returns of the market linked investment product. However, in spite of the volatility associated with the returns of a market linked returns product the higher returns over the long term help offset the effect of inflation on the real returns from the investment.

Effect on Purchasing Power

Inflation is an increase in the general level of prices, and, over time, it decreases the value of money. As a result, a given amount of money will purchase a smaller basket of goods in the future, thus reducing its purchasing power.

(Also read- Why understanding Time Value of Money and Purchasing Power important in planning your Retirement?)

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