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Retirement Solution

This book is a part of the course by Jaipur National University, Jaipur.This book contains the course content for Retirement Solution.

JNU, JaipurFirst Edition 2013

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JNU makes reasonable endeavours to ensure content is current and accurate. JNU reserves the right to alter the content whenever the need arises, and to vary it at any time without prior notice.

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Index

ContentI. ...................................................................... II

List of FiguresII. ........................................................... V

AbbreviationsIII. .........................................................VI

Case StudyIV. ............................................................ 104

BibliographyV. .......................................................... 109

Self Assessment AnswersVI. ..................................... 112

Book at a Glance

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Contents

Chapter I ....................................................................................................................................................... 1Retirement .................................................................................................................................................... 1Aim ................................................................................................................................................................ 1Objectives ...................................................................................................................................................... 1Learning outcome .......................................................................................................................................... 11.1 Introduction .............................................................................................................................................. 21.2 Redefined Retirement .............................................................................................................................. 2 1.2.1 Requirement for Successful Retirement Life ........................................................................... 21.3 Phases of Retirement ................................................................................................................................ 41.4 Transition ................................................................................................................................................. 51.5 Active Living ........................................................................................................................................... 71.6 Slowing Down ......................................................................................................................................... 81.7 Keys to Retirement Success ..................................................................................................................... 91.8 Retirement Vision .................................................................................................................................... 9Summary ......................................................................................................................................................11References ....................................................................................................................................................11Recommended Reading ..............................................................................................................................11Self Assessment ........................................................................................................................................... 12

Chapter II ................................................................................................................................................... 14Retirement Planning .................................................................................................................................. 14Aim .............................................................................................................................................................. 14Objectives .................................................................................................................................................... 14Learning outcome ........................................................................................................................................ 142.1 Introduction to Retirement Planning ...................................................................................................... 152.2 Types of Pension Plans .......................................................................................................................... 15 2.2.1 Types of Pensions .................................................................................................................. 162.3 Criteria for Choosing a Retirement Plan ................................................................................................ 162.4 Factors Affecting Your Retirement Planning ......................................................................................... 172.5 How Much would you Require at Retirement? ..................................................................................... 18 2.5.1 Steps Involved in Determining the Requirement for Retirement Plan .................................. 19Summary .................................................................................................................................................... 20References ................................................................................................................................................... 20Recommended Reading ............................................................................................................................ 20Self Assessment .......................................................................................................................................... 21

Chapter III .................................................................................................................................................. 23Funding Retirement .................................................................................................................................. 23Aim .............................................................................................................................................................. 23Objectives .................................................................................................................................................... 23Learning outcome ........................................................................................................................................ 233.1 Introduction ............................................................................................................................................ 243.2 Current Financial Status ......................................................................................................................... 243.3 Net Worth Analysis ................................................................................................................................ 253.4 Analyse the Cash Flow ........................................................................................................................... 263.5 Debt Reduction ...................................................................................................................................... 303.6 Saving for Retirement ............................................................................................................................ 313.7 Estimating the Needs ............................................................................................................................. 323.8 The Impact of Inflation .......................................................................................................................... 32Summary ..................................................................................................................................................... 33References ................................................................................................................................................... 33Recommended Reading ............................................................................................................................. 33Self Assessment ........................................................................................................................................... 34

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Chapter IV .................................................................................................................................................. 36Investing the Retirement Savings ............................................................................................................ 36Aim .............................................................................................................................................................. 36Objectives .................................................................................................................................................... 36Learning outcome ........................................................................................................................................ 364.1 Introduction ............................................................................................................................................ 374.2 Risk Elements ........................................................................................................................................ 374.3 Diversification Spreads the Risk ............................................................................................................ 384.4 The Magic of Compounding .................................................................................................................. 394.5 Determining an Investment Strategy ..................................................................................................... 394.6 Allocating Savings Among the Choices ................................................................................................. 404.7 Guidelines to Reach the Goals ............................................................................................................... 414.8 Mutual Funds ......................................................................................................................................... 414.9 Hiring a Financial Advisor ..................................................................................................................... 43 4.9.1 Methods of Compensation ..................................................................................................... 43 4.9.2 Choosing an Advisor .............................................................................................................. 444.10 Professional Money Managers ............................................................................................................. 444.11 Investment Tips .................................................................................................................................... 44Summary ..................................................................................................................................................... 48References .................................................................................................................................................. 48Recommended Reading ............................................................................................................................. 48Self Assessment ........................................................................................................................................... 49

Chapter V .................................................................................................................................................... 51Spending Retirement Savings ................................................................................................................... 51Aim .............................................................................................................................................................. 51Objectives .................................................................................................................................................... 51Learning outcome ........................................................................................................................................ 515.1 Introduction ............................................................................................................................................ 525.2 The Squeeze-and-Spend Strategy .......................................................................................................... 525.3 The Squeeze-and-Save Strategy............................................................................................................ 535.4 The Modest-Cushion-And-Relax Strategy............................................................................................. 545.5 The Big-Cushion/Save-Save Strategy .................................................................................................... 545.6 The Capital-Protection/Spend-Interest Strategy .................................................................................... 555.7 The Actuarial Strategy ........................................................................................................................... 565.8 The Big-Scare Contingency Strategy ..................................................................................................... 575.9 The Share-the-Wealth Strategy .............................................................................................................. 585.10 Tapping the Home Equity .................................................................................................................... 595.11 Tools to Help Plan Their Spending ...................................................................................................... 605.12 Income Tax ........................................................................................................................................... 615.13 The Long-Term Financial Strategy ...................................................................................................... 62Summary ..................................................................................................................................................... 64References .................................................................................................................................................. 64Recommended Reading ............................................................................................................................ 64Self Assessment ........................................................................................................................................... 65

Chapter VI .................................................................................................................................................. 67Insurance .................................................................................................................................................... 67Aim .............................................................................................................................................................. 67Objectives .................................................................................................................................................... 67Learning outcome ........................................................................................................................................ 676.1 Introduction ............................................................................................................................................ 686.2 Definition of Insurance .......................................................................................................................... 686.3 Insurance Goals ...................................................................................................................................... 696.4 Managing Risks ..................................................................................................................................... 70

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6.5 Become Self Insured .............................................................................................................................. 716.6 Transfer Risk to an Insurance Company ................................................................................................ 726.7 Types of Risk ......................................................................................................................................... 726.8 Meeting the Insurance Needs ................................................................................................................. 736.9 Tips on Shopping for Insurance ............................................................................................................. 74Summary .................................................................................................................................................... 75References .................................................................................................................................................. 75Recommended Reading ............................................................................................................................ 75Self Assessment .......................................................................................................................................... 76

Chapter VII ................................................................................................................................................ 78Pension and Benefits of Retirement ......................................................................................................... 78Aim .............................................................................................................................................................. 78Objectives .................................................................................................................................................... 78Learning outcome ........................................................................................................................................ 787.1 Classes of Pension.................................................................................................................................. 797.2 Retirement Benefits .............................................................................................................................. 80 7.2.1 Pension ................................................................................................................................... 80 7.2.2 Commutation of Pension ...................................................................................................... 81 7.2.3 Death/Retirement Gratuity ..................................................................................................... 81 7.2.4 General Provident Fund and Incentives ................................................................................. 82 7.2.5 Contributory Provident Fund ................................................................................................. 82 7.2.6 Leave Encashment ................................................................................................................. 83 7.2.7 Central Government Employees Group Insurance Scheme .................................................. 837.3 Welfare Measures for Pensioners ........................................................................................................... 83Summary .................................................................................................................................................... 85References .................................................................................................................................................. 85Recommended Reading ............................................................................................................................. 85Self Assessment .......................................................................................................................................... 86

Chapter VIII ............................................................................................................................................... 88Pension Plan Products .............................................................................................................................. 88Aim .............................................................................................................................................................. 88Objectives .................................................................................................................................................... 88Learning outcome ........................................................................................................................................ 888.1 Introduction ............................................................................................................................................ 898.2 ICICI Prudential .................................................................................................................................... 89 8.2.1 LifeLink Super Pension Plan ................................................................................................. 90 8.2.2 LifeTime Super Pension ........................................................................................................ 908.3 Kotak Retirement Plan .......................................................................................................................... 918.4 LIC’s Jeevan Nidhi ............................................................................................................................... 928.5 Reliance Life Insurance Retirement Plans ............................................................................................ 93 8.5.1 Reliance Total Investment Plan Series II - Pension ............................................................... 93 8.5.2 Reliance Super Golden Years Plan ........................................................................................ 94 8.5.3 Reliance Super Golden Years Plan Value .............................................................................. 95 8.5.4 Reliance Wealth + Health Plan .............................................................................................. 958.6 ING Life Insurance ................................................................................................................................ 95Summary ................................................................................................................................................... 101References ................................................................................................................................................. 101Recommended Reading ........................................................................................................................... 101Self Assessment ......................................................................................................................................... 102

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List of Figures

Fig. 1.1 Basic ingredients of retired life ........................................................................................................ 3Fig. 1.2 Phases of retirement .......................................................................................................................... 4Fig. 1.3 Milestones in retirement ................................................................................................................... 4Fig. 1.4 Three parts to a successful retirement transition plan ...................................................................... 6Fig. 1.5 Suggestions for comfortable transition ............................................................................................. 7Fig. 2.1 Types of pensions ........................................................................................................................... 16Fig. 2.2 Criteria for selecting a retirement plan ........................................................................................... 17Fig. 2.3 Factors affecting your retirement planning..................................................................................... 17Fig. 3.1 Types of liabilities ........................................................................................................................... 25Fig. 3.2 Types of debts ................................................................................................................................. 26Fig. 3.3 Cash flow statement ........................................................................................................................ 27Fig. 3.4 Types of free cash flow ................................................................................................................... 29Fig. 3.5 Sources of retirement savings ......................................................................................................... 31Fig. 4.1 Principals of investing .................................................................................................................... 37Fig. 4.2 Types of risks .................................................................................................................................. 38Fig. 4.3 Factors affecting investment strategy ............................................................................................. 39Fig. 4.4 Working of mutual fund .................................................................................................................. 41Fig. 4.5 Types of potential charges to mutual fund investors ...................................................................... 42Fig. 4.6 Types of stock mutual funds ........................................................................................................... 43Fig. 5.1 Advantages and disadvantages of squeeze and spend strategy ....................................................... 53Fig. 5.2 Advantages and disadvantages of squeeze and save strategy ......................................................... 53Fig. 5.3 Advantages and disadvantages of modest cushion and relax strategy ............................................ 54Fig. 5.4 Advantages and disadvantages of big-cushion/save-save strategy ................................................. 55Fig. 5.5 Advantages and disadvantages of capital-protection/spend-interest strategy ................................. 56Fig. 5.6 Advantages and disadvantages of the actuarial strategy ................................................................. 57Fig. 5.7 Advantages and disadvantages of the big-scare contingency strategy ........................................... 58Fig. 5.8 Advantages and disadvantages of share the wealth strategy .......................................................... 59Fig. 5.9 Tools to Plan Spending ................................................................................................................... 60Fig. 6.1 Insurance goals ............................................................................................................................... 69Fig. 6.2 Managing risk ................................................................................................................................. 70Fig. 8.1 Retirement plans of ICICI Prudential ............................................................................................. 89Fig. 8.2 The Kotak retirement income plans ................................................................................................ 91Fig. 8.3 Reliance life insurance plans .......................................................................................................... 93Fig. 8.4 ING life insurance plans ................................................................................................................. 96

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Abbreviations

APR - Annual Percentage RateCCC - Commodity Credit CorporationIRA - Individual Retirement AccountSEC - Securities and Exchange CommissionTIPS - Total Investment Plan SeriesULIP - Unit Link Insurance Plan

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Chapter I

Retirement

Aim

The aim of this chapter is to:

explain redefined retirement•

define requirement for successful retirement life•

converse phases of retirement•

Objectives

The objectives of this chapter are to:

explain active living •

define transition•

elucidate slowing down•

Learning outcome

At the end of this chapter, you will be able to:

discuss keys to retirement success•

understand retirement vision•

confer keys to make transitio• n comfortable

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1.1 IntroductionRetirement for ordinary people is a phenomenon of modern, industrialised society. Today, millions of people retire each year. Retirement is the goal that most workers and small business owners look forward to as an appropriate conclusion to their careers. People retiring today are finding a different experience than those who retired a generation ago. Retirement is no longer a concept of relatively short period at the end of life, in which people take it easy and tend to household chores. Today, a substantial period of active living can span as much as a third of their lifetime. The image of retirement as idle time spent walking in the park, dozing by the fire, playing golf, or fishing has been replaced by a vision of unlimited opportunities for fulfilment.

1.2 Redefined RetirementThe period of a person’s life during which he/she is no longer working, or the commencement of that period. • The standard age for retirement in the United States is considered 65, although many individuals choose to retire earlier or later due to personal or financial reasons. After retirement, an individual’s needs are usually funded through any combination of sources including a pension plan, a retirement account or any other personal savings. The investment community’s thought process is imbedded in Portfolio Theory. Debates center on active vs. • passive investing, optimised allocations, and safe withdrawal rates. The assumptions of Portfolio Theory have explained the risk/return relationship in terms of beta, standard deviation, alpha, covariance and Monte Carlo simulations. The goal of managing a portfolio to get the most possible return for the least amount of risk is indeed noble and desirous. Modern Portfolio Theory’s mathematical sophistication supports the notion that over time, equity markets are • the best place to make money over and against other assets, inflation and taxes. Portfolio risk can be reduced through specific optimisations, while recognising that systematic or market risk cannot be eliminated. These risk computation metrics have been demonstrated over extended periods and then converted into averages that are quite attractive. Our focus is on how Portfolio Theory has been applied to those near or in retirement. Is it possible that these • historical averages purported by Portfolio Theory have broke advisors and consumers into accepting too much risk during the retirement phase? Thus far, this risk has been accepted by trying to sustain a retirement plan based on an income-producing, market-based portfolio. MRT questions if that is really the best approach for individual retirees. The purpose of retirement is to give people the chance to do all of the activities that they couldn’t do while they • were working 40 to 60 hours per week. For some people, retirement is a chance to finally dabble in creative pursuits such as painting, photography, music, carpentry or gardening. Spending more time with one’s family, especially grandchildren, is another welcome benefit to no longer punching a time clock. If they have always wanted to travel but were previously unable to get away for more than a long weekend, they can now enjoy a much deserved vacation and, in many cases, take advantage of lower weekday rates and senior citizen discounts for accommodations. If they are empty-nesters, a retired couple may decide to renovate their home or to downsize to a smaller residence. • A number of retirees return to college classrooms to keep their minds sharp or to finally get that degree they never had time for when they were working full-time. There is also a growing population of mature workers who decide to go into business for themselves (i.e., consulting in the same field that made them experts) or trying a completely different line of work just for the fun of it.

1.2.1 Requirement for Successful Retirement Life

Insurance agencies help clients with retirement planning within which one can invest the most appropriate • growth assets for personal objectives.For some clients, the chosen growth asset in the pension to meet their retirement planning objectives might be a • portfolio of equity-based funds to match the client’s risk profile and which would then be reviewed monthly under our streamlined wealth management process, providing long-term growth until retirement income is needed.

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For other clients the most suitable growth asset in the pension might be a commercial property which can be • rented back to a limited company controlled by the client. Modern approach to retirement planning takes advantage of efficient and cost effective independent pension • companies enabling us to provide a bespoke service at a controlled cost.

Retirement optionsAs a matter of course we advise our clients on the numerous options available under pensions law which a • combination of some or all of the following:

a lump sum (Pension Commencement Lump Sum formally called Tax-Free Cash) �buy a fixed income for life (annuity) or simply draw regular or ad-hoc income directly from the pension �fund (Unsecured Pension or Alternatively Secured Pension)

If we want to retire soon, we need to plan to ensure that our future life is truly golden. A meaningful, fulfilling • retirement requires three basic ingredients:

Adequate financial reserves

Emotional adjustment

Good health

Fig. 1.1 Basic ingredients of retired life

Our financial well-being will depend on our financial reserves, pension benefits including pension scheme and lifestyle needs. We can determine our financial well-being by inventorying our current reserves; developing a post-retirement budget that allows for the estimated impact of future inflation and assessing our ability to make the necessary additions to savings to meet our needs.

Our physical well-being will depend on hereditary factors, where we live, how well we have maintained our • health and commitment to future health. Eating and exercising habits can be assessed and its impact on the future can be well determined. Longevity is determined by heredity, lifestyle and environment. Clearly, people can make a difference. Their • emotional well-being will depend on how well people make the transition from work to other activities. This includes developing a new personal identity apart from their career, leaving colleagues behind, making new • friends, developing positive relationships with family members and getting involved in activities that maintain and enhance their self-esteem.

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1.3 Phases of RetirementA six-stage process described by researcher Robert Atchley that includes:

Routine

Reorientation

Disenchantment

Contentment

Retirement

Pre-retirement

Fig. 1.2 Phases of retirement

Not all individuals will experience all of these stages, but the underlying idea is to provide a framework for thinking of retirement as a process that involves both emotional and financial adjustments rather than just a one-time event.

Considering the age factor, phases of retirement has been divided into four main milestones. They are as follows:

Pre-Retirement

ActiveRetirement

StableRetirement

SecureRetirement

55-64 65-74 75-84 85+

Fig. 1.3 Milestones in retirement

Pre retirement (55 to 64 years)• Retirement budget planning �Social security and advance healthcare planning �Final stage of asset accumulation �

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Active retirement (65 to 74 years)• Part time employment or volunteerism �Increased travel and leisure activities �Higher level of income distribution �

Stable retirement (75 to 84 years)• Travel and leisure scaled back �Health issues may surface �Lower level of income distribution �

Secure retirement (85+)• Predictable daily pattern �Potential for onset of chronic or catastrophic illness �Highest level of income distribution �

Most people face retirement with apprehension. Some have such deep-seated fears that they extend their working years indefinitely. One reason why this happens is because people see retirement as a fixed, linear period that offers decreasing fulfilment instead of a succession of states, each with special opportunities. The phases cannot be clearly separated and overlaps are to be expected, but knowing there are opportunities for fulfillment in each stage gives retirement a new and more exciting perspective. The bad news is that digging out the rewards may become difficult as people move on to the next stage; the good news is that they may enjoy and appreciated more. When considering their retirement years, one needs to keep the following factors in mind:

There is no such thing as a completely predictable retirement. People are more individualistic during this part • of their life than in the youth and adult periods.Retirees are free to stretch or shorten some phases and eliminate others. Obviously, it would be unacceptable • to prescribe or even suggest a retirement lifestyle for another.With health as the joker in retirement planning, no specific time periods can be assigned either to retirement as • a whole or to the separate phases. People are invited, however, to predict time periods for them. For example, people could go to a mortality table where annuity experts predict (depending on their age and sex) how many years people are expected to live. If the table say 30 years, people might anticipate three years in transition, 15 years in active living, 10 years of slowing down and two years in assisted living.Attitude is the psychological factor that loads the floor in favour of a longer and fulfilling retirement. To develop • a positive attitude, anticipate getting the most out of each stage as it arrives, then recognise that each phase has its own inventory of pleasures and rewards.

People must be determined to squeeze as much out of each phase as possible. With this kind of attitude, opportunities multiply in each stage and with good health it is possible to live up to their highest expectations.

1.4 TransitionThe retirement transition takes you from your productive working stage of life to the stage of doing what you want to do, when you want to do it, that is, to your new life stage of retirement.

The type A personality that was successful during working years does not often fit the new stage of retirement • life, if your plan is an inactive relaxed retirement.Wikipedia explains that type A individuals can be described as impatient, excessively time-conscious, insecure • about their status, highly competitive, hostile and aggressive, and incapable of relaxation. In contrast, type B individuals are described as patient, relaxed, and easy-going.The transition to retirement begins with ending one phase of life, followed by a neutral or unknown phase, and • finally the new beginning The transition to retirement can often take approximately five years.You need to successfully let go off the previous phase of life before you can move forward into the next • phase.

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Planning Transition to RetirementPeople assume that the retirement transition needs little planning because they feel it is an easy transition - kind of like the transition from the work week to the weekend. However, retirement is a significant life change. The transition to retirement is more difficult for those who are forced to retire.

Because the average life expectancy has increased and forced early retirement is more frequent, retirees can expect to live 20-30 years in retirement, which is a good one-third of your life.

You need a plan that deal with both your financial needs, as well as, the non-financial. Find activities that provide • purpose and meaning to life.Planning that makes the transition to retirement easier includes developing a budget for expenses and an asset • allocation strategy for investments, as well as, determining the withdrawal strategy from you various retirement income streams.Retirement is one of life’s most difficult transitions, comparable to divorce or death of a spouse. It is a more • difficult adjustment than getting married or becoming parents. The best way to transition to a meaningful retirement life is to plan for it.There are three parts to a successful retirement transition plan •

Successful retirement

transition plan

Physical activity

Mental activity

Socialactivity

Fig. 1.4 Three parts to a successful retirement transition plan

Retirement is a transition from one life to another. At the beginning it feels like a better time, but major adjustments • may be necessary later. Sometimes it is stormy at first, but once people find a new role and identity, retirement living is safely under way. Few retirees move into retirement without facing any difficult times. Leaving a full-time career and adjusting to • leisure activities, finding a part-time job or volunteer involvement or embarking on a personal creative adventure is a far cry from preparing for an extended trip or vacation. The old ego satisfactions are gone. The routine is gone. The security of regular pay check with all the benefits has been replaced with a new system. The old door has been closed and a new one needs to be opened. A new identity needs to be found. A minimum of one year is usually required for an individual to make a safe passage into retirement. Sometimes it takes three or four years and a few never make it at all. This happens when one opens a new door (retirement) but refuses to close the old door (previous work) and • winds up in limbo, often returning to full-time work and the possibility of a second retirement attempt down the line.

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To make their transition shorter and more comfortable, here are five suggestions they should follow:

Realise that it can not be same routine everyday; someday, sometime it is going to be changed. So better be prepared for any change.

Leave all excess baggage from previous work experience behind.

Anticipate some rocky days and device a strategy to lessen the discomfort people may feel.

Regular exercise can be a big help. If people are making their passage with a life partner, talk openly about transition problems so people can reinforce each other.

If it is not already under way, do a better job of retirement planning by anticipating and preparing for four phases, instead of one.

Fig. 1.5 Suggestions for comfortable transition

1.5 Active LivingThis is the time to achieve their retirement “thing,” whatever it may be. Did people harbour a retirement dream • during their working years? Have people always wanted to do something but their career prevented it? If so, now is the time to fulfill old dreams and create new ones. These are days of excitement, achievement, and risk-taking.People may not be able to get up the head of steam they could 20 years ago, but there is little out of their reach. • Their battle cry should be: “Make the most of this period.” Almost everyone has one or more goals to fulfill during retirement. Although some goals (trips and so on) may be completed during the transition period, major projects are often best delayed until people have “found themselves’ and feel comfortable in this phase. People who enter retirement without goals usually drift until they find something to fill their time.• Most commonly, goals fall into such categories as consulting or part-time work for others, significant volunteer • involvement, starting a small business, serious creative pursuits and lasting hobbies. The range is as broad as the range of retirees themselves and once started, many surprise themselves with their success and enthusiasm. Most retirees know that this phase provides the big opportunity for fulfillment in the more active pursuits. Later, some scaling down may be necessary. It is a period when late bloomers (those who may have been restricted in their work years) come into their own. • Under the old-fashioned concept of retirement, all years were to be “mellow” and “golden.” Today, the early years are full of action, involvement and accomplishment.Due to earlier retirements, better financial planning and medical advancements, some retirees are successful in • stretching this phase up to 20 years. But sooner or later (often depending upon one’s health), one is willing to think about moving into the next phase.

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Many people decide that retirement is the perfect time to move house. They are no longer restricted to area or • ease of commute and it is a great opportunity to start a new life in a dream destination. It is a decision to be considered carefully. As with any major change in life, there are advantages and disadvantages and you need to make an informed choice, comparing the life you have now with the realities of your new life. Many people move to a smaller property in retirement. This makes financial sense. If your family have ‘fled the • nest’ could you manage with a smaller house or flat? If you have a larger house to sell you could unlock capital which would enable you to do other things in retirement – maybe take that holiday you have always fancied, change the car or use as a nest egg to improve your retirement income. If your family are a distance away this may be something you are considering. It makes a lot of sense. You get • regular contact with your family as opposed to the ‘all or nothing’ contact that happens when they stay with you. If you are fit, maybe you can help with grandchildren, home maintenance, taking in parcels etc and you are less likely to be lonely as you get older and need more support from them.

1.6 Slowing DownSlowing down time is inevitable factor of retirement life. It is a period of shedding previous demands, learning to say no and mellowing out. It is time to throw off pressures and think more of themselves.

Staying home with simple pleasures may start to become as enjoyable as participating in social events or • accepting strenuous outside involvement. Some of this occurs because of lower energy levels, some by preference. Some individuals are happier in this • phase than the prior one. These retirees do not like too much activities and when they start slowing down, they enter a comfort zone that provides more fulfilments, not less. Often one life partner reaches this stage ahead of the other. This phase can last as long as the prior phase, and • sometimes longer. Self-pacing and involvement balance seem to be the keys. People do not want to slow down life to the point where things begin to drag; on the other hand, anxiety is more difficult to handle. Often after making a commitment to do something strenuous, doubts appear. Of course, to the energetic retiree • still in the middle of active living, a slower and balanced pace may seem boring. Once there, these same people might think differently and appreciate their new comfort zone.The danger in this phase lies in misunderstanding just what balance means. For example, it does not mean a • drastic change, but a slower, softer approach that retains some of the activity blended with more quiet times. Achieving just the right balance is an individual matter. Some can handle considerable social activity outside • the home; others need only a sprinkle of the outside world to enhance their home-centered comfort zone. It can take a few years to reach a satisfactory balance because people keep frustrating themselves by trying to return to active living instead of relaxing and enjoying the new pace.

Some tips for adjusting to the retired life:It’s a big adjustment to go from a life of hurry to a life of leisure. But you’ve earned it. Here are some tips for adjusting to the relaxed pace of retirement.

Slow down your wake-up routine. Now you can wake up when you’re good and ready. • Stretch out your exercise • Travel leisurely • Take the time to learn something new. Nothing is stopping you now that you’ve got all the time in the world. • Learn to play guitar, sew, or speak a foreign language. By focusing on a new skill, you’re living in the moment and engaging your brain.Don’t rush into new commitments. Your retirement plans may include volunteering, trying out a new career, • or even starting your own business. Retirement is a great time to explore your passions. Before you make any major commitments though, take • some time to unwind from those working years. Enjoy your new pace. Let it lead you down the meandering path toward a fulfilling retirement.

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1.7 Keys to Retirement SuccessSome important keys to retirement success are:Make a contributionWhatever you do next, it should be meaningful. It should make you happy. It should make you feel as if you’re making a contribution. And whatever you do, don’t let your age be the limiting factor.

Do more of the same, or notDoing nothing isn’t an option. In fact, it’s a bad plan. Experts don’t disagree about that. They do, however, debate whether you should do what you know in retirement or do something entirely different. If you aren’t doing what you love in retirement, then you might want to do some soul-searching.

It takes work to find work in retirementYou may have to set aside any notions about working only for a non-profit organisation. In some cases, you may enjoy working more for a for-profit company. But you can work for a non-profit or a for-profit. It could take a great deal of soul-searching to figure out what you want to do with the rest of your life. So don’t wait until the first day of retirement to think about what could be the most important part of your life. That doesn’t mean you should know exactly what it is that you want to do.

Wait before you leapGiven the current economy, it’s quite possible there aren’t a lot of jobs out there at the moment for retirees.

Get real offersNow, it’s one thing to say that you want to work in retirement. But it’s a whole another thing to do so. With a real offer, you can make a real decision.

Promote yourselfIn retirement, you will need to learn how to be your own best advocate. You will have to learn how to promote yourself in a positive way. In the absence of such self-promotion, someone else is likely to end up with the job you covet.

Working, out of want or needWhether you work in retirement because you need the money or because you want to work, you have to find meaning and happiness in your life.

1.8 Retirement VisionAccording to Valentine, there are nine “Retirement Truths” that will help retirees make the most of their newfound time and give positive vision towards retirement:

Retirement truth 1: Aging brings wisdom, not decline It has been said that what you think about, you bring about. Telling yourself you are going to flourish in retirement can become a self-fulfilling prophecy. At the very least, you might take slightly better care of yourself and, in turn, find your way into the virtuous circle of feeling better emotionally and physically, doing more interesting things and ultimately enjoying yourself more.

Retirement truth 2: Age is just a numberChronological age is merely the number of candles on your birthday cake, while psychological age is your perception of how vital and vibrant you feel. Since the latter is a subjectively experienced age, you have a great deal of latitude in constructing beliefs that will either help you or limit your ability to flourish after 50. Construct wisely.

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Retirement truth 3: Creativity helps design your lifestyleDiscovering and exploring your everyday creativity is going to make a difference between boredom and the pure joy of being alive. Everyday creativity is invoked when the object of your creative efforts is your own life. It taps into our deepest need to feel useful and valuable. A creative life approach fosters flexibility and resourcefulness, helping you chooses new pursuits, evolve with the changing times and design a satisfying lifestyle.

Retirement truth 4: Fulfilling true needs is essentialKnowing what you want and, more importantly, what you need, is difficult but critical. You cannot be happy without it. Research shows meeting one’s personal needs is essential for psychological health and, consequently, for more profound happiness, serenity and a high quality of inner life.

Retirement truth 5: Know your motivationKnowing why you do something is important because it will motivate you to go through with the action. Motivation is how we access the energy necessary to do anything, whether that means saving, acquiring new skills or staying fit to enjoy life after 50. Understanding your own intentions and desired result of any decision or activity will result in clarity, less frustration, more of what you want and less guilt about foregoing what doesn’t meet your needs.

Retirement truth 6: Fail to plan, plan to failResearch proves that a successful, happy retirement is impossible without planning based on self-examination. Beyond financial planning, it is imperative to take time to figure out what lifestyle needs must be fulfilled to make you happy, and then find specific ways to ensure those needs can be met. Retirement lifestyle design then becomes the driver for making good choices and building the foundation of physical, emotional and financial health that ensures joy and fulfillment after 50.

Retirement truth 7: Evolution trumps fear Do not be dragged along by the changing times when you have the freedom to preside over the process. While evolution may not always mean improvement or progress, life’s progression is certainly an inevitability that should be embraced, not eschewed. Change should be revered, not feared, as with change comes new learning and growth experiences — new opportunities and ways to contribute, to be significant and to create meaningful experiences for yourself and for the people around you.

Retirement truth 8: Joy requires harmonyA joyful life can only be truly achieved if your inner and outer worlds are in harmony — the alignment of your life’s needs and direction with your inner resources, like attitude, abilities, talents, skills, experience and personality traits. People wholly integrated at this level are conscious of their needs, emotions, impulses, pleasures and pains. They enjoy an amazing quality of life with frequent peak experiences and are more at peace.

Retirement truth 9: Quality of life requires more than moneyIt is easy to mistake comfort for quality of life. An astonishing quality of life encompasses both material comfort and joy. To live with joy, it is imperative to not only identify and understand your emotional needs, but actively work to meet them. Do this and the second half of your life will be even better than the first.

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SummaryRetirement can equal a third or more of the lifetime 30 or more years.• As a result of increased longevity, earlier retirements, and greater financial independence, old age has become • something to look forward to rather than dread.A meaningful, fulfilling retirement requires attention to their financial, physical, and emotional well-being.• Retirement consists of distinct phases. Following a transition, there are periods of active living, slowing down, • and assisted living. Each should be anticipated and enjoyed.The challenge of retirement knows how to spend their time in rewarding ways.• Retirement is freedom, opportunity, and choices.• Retirement is a transition from one life to another. At the beginning it feels like a better time, but major adjustments • may be necessary later. Sometimes it is stormy at first, but once people find a new role and identity, retirement living is safely under way. Longevity is determined by heredity, lifestyle and environment. Clearly, people can make a difference. • Attitude is the psychological factor that loads the floor in favour of a longer retirement. •

ReferencesKaplan, L. J., 2004. • Retiring right: planning for a successful retirement, Square One Publishers.Adams, G.A. and Beehr, T. A., 2003. • Retirement: reasons, processes, and results, Springer Series, revised, Springer Publishing Company.Investopedia, • Phases of retirement [Online] Available at: <http://www.investopedia.com/terms/p/phases-retirement.asp> [Accessed 20 July 2011].Hatch retirement services. • Individualized investment strategies. [Online] Available at: <http://hatchplan.com/InvestmentStrategies.html> [Accessed 20 July 2011].Stain, B., 2007. • Ben Stein Talks Retirement - Part 1. [Video online] Available at: <http://www.youtube.com/watch?v=3eAo3IwJx0A> [Accessed 22 July 2011].TransformRetirement, 2011. • How to manage your retirement transition successfully. [Video online] Available at: <http://www.youtube.com/user/TransformRetirement?blend=7&ob=5> [Accessed 22 July 2011]. Mrgeorged, 2009. • Top Gear The Stig revealed Full. [Video Online] Available at: <http://www.youtube.com/watch#!v=eTapK5dRaw4> [Accessed 23 June 2009].

Recommended ReadingDonogue, W. E., 1987. • Donoghue’s Investment Tips for Retirement Savings, HarperCollins. Ameriks, J., 2008. • Recalibrating Retirement Spending and Saving, Oxford University Press.Baldwin, B. G., 2001. • The new life insurance investment advisor, McGraw-Hill Professional.

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Self AssessmentState which of the following is true.1.

Retirement is the goal that most workers and small business owners look forward to as an appropriate a. conclusion to their careers.Service is the goal that most workers and small business owners look forward to as an appropriate conclusion b. to their careers.Emotional well being is the goal that most workers and small business owners look forward to as an c. appropriate conclusion to their careers.Physical well being is the goal that most workers and small business owners look forward to as an appropriate d. conclusion to their careers.

____________ is determined by heredity, lifestyle, and environment.2. Physical fitnessa. Longevityb. Emotional well beingc. Life styled.

State which of the following is true.3. Slowing down time is expected factor of retirement life.a. People who enter retirement without goals usually drift until they find something to fill their time.b. Retirement can equal a half or more of the lifetime 50 or more years.c. Longevity is determined by eating and exercise.d.

______________ will depend on hereditary factors, where we live, how well we have maintained our health, 4. and their commitment to their future health.

Social well beinga. Financial well beingb. Physical well-beingc. Longevityd.

People are more ____________ during retired period of their life cycle than in the youth and adult periods.5. egoistica. emotionalb. independentc. individualisticd.

______________ is the psychological factor that loads the floor in favour of a longer, more fulfilling 6. retirement.

Attitudea. Egob. Lonelinessc. Dependency d.

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Retirement is a ______________ from one life to another.7. dependencya. stageb. responsibilityc. transition d.

If people are making their passage with a life partner, talk openly about transition problems so people can 8. __________ each other.

motivatea. forceb. reinforcec. support d.

_______________ is a period of shedding previous demands, learning to say no, and mellowing out.9. Slowing downa. Retirementb. Being independentc. Transition d.

State which of the following is true.10. People can not continue to be productive and creative, and to grow intellectually for a number of years.a. A meaningful, fulfilling retirement requires attention to only financial security.b. Retirement is freedom, opportunity, and choices.c. People like to slow life down to the point where things begin to drag.d.

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Chapter II

Retirement Planning

Aim


explain retirement planning•

enlist the types of pension plans•

describe different types of pensions•

Objectives


describe the types of pension plans•

explain the factors effecting your retirement planning•

enlist the criteria for choosing a retirement plan •

Learning outcome


understand retirement planning•

discuss defined-benefit plans •

enlist the steps involved in• determining requirement for retirement plan

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2.1 Introduction to Retirement PlanningRetirement is one of the most significant life events that most people will ever experience. From both a personal and financial viewpoint, realising a comfortable retirement is an extremely extensive procedure that takes sensible planning and years of perseverance. Even once it is reached; managing your retirement is an ongoing accountability that carries well into one’s golden years. Although all of us would like to retire happily, the difficulty and time required in building a successful retirement plan can make the whole procedure seem nothing short of daunting. However, it can often be done with fewer headaches (and financial pain) than you might think - all it takes is a little homework a possible savings and investment plan and a long-term commitment.

A pension plan is an assurance by a pension plan sponsor to a plan member to supply a pension after retirement. Retirement planning basically is planning for a stable income after retiring from regular work. It is an investment choice where the returns are allocated after a gestation period. Individuals investing in retirement profit schemes usually earn pension over an extended period. Planning for retirement earning is best done throughout the course of regular job or practice. Saving frequently is the initial step towards planning for investment. The earlier an individual starts saving the higher is the amount of investment possible. All investments yield interest and rate of interest earned on longer terms generally outweighs inflation rates.

2.2 Types of Pension PlansGenerally a pension plan is a way in which an employee transfers part of his or her current income stream towards the retirement income. There are two main types of pension plans:

Defined-benefit plans• Defined-contribution plans.•

Defined-benefit plansIn a defined-benefit plan the employer guarantees that the employee will be given a definite amount of benefit upon retirement regardless of the performance of the underlying investment pool.

Defined-contribution plansIn a defined-contribution plan the employer makes predefined contributions for the employee but the final amount of benefit received by the employee depends on the investment’s performance. In common a pension is an agreement to provide people with an income when they are no longer earning a regular income from employment. The terms retirement plan or superannuation refer to a pension settled upon retirement. Retirement plans may be set up by employers, Insurance companies, the government or other institutions such as employer associations or trade unions. Retirement pensions are classically in the form of a guaranteed annuity.

A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labour unions, the government or other organisations may also fund pensions. Occupational pensions are a form of deferred compensation generally beneficial to employee and employer for tax reasons. Many pensions also contain an insurance aspect since they often will pay benefits to survivors or disabled beneficiaries while annuity income insures against the risk of longevity. Other vehicles may provide a similar stream of payments. The general use of the term pension is to explain the payments a person receives upon retirement usually under pre-determined legal and or contractual terms. A receiver of a retirement pension is known as a pensioner or retiree.

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2.2.1 Types of PensionsFollowing are the types of pensions

Types of pensions

Employment-based pensions (retirement

plans)

Social / state pensions

Disability pensions

Fig. 2.1 Types of pensions

Employment-based pensions (retirement plans)A retirement plan is an agreement to provide people with an income during retirement when they are no more earning a steady income from employment. Often retirement plans require both the employer and employee to contribute money to a fund throughout their employment in order to receive defined benefits upon retirement. Funding can be provided in other ways such as from labour unions, government agencies or self-funded schemes. Pension plans are therefore a form of deferred compensation.

Social / state pensionsMany countries have shaped funds for their citizens and residents to provide income when they retire or in some cases become disabled. Normally this requires payments during the citizen’s working life in order to succeed for benefits later on.

Disability pensionsSome pension plans will offer for members in the event they suffer a disability. This may take the form of early entry into a retirement plan for a disabled member below the normal retirement age.

2.3 Criteria for Choosing a Retirement PlanAfter deciding for investing in a retirement scheme, it is important to understand the benefits of the same. The criteria for selecting a retirement plan are:

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Terminal bonus

Bonus

Criteria for selecting a retirement

plan

Life coverage

Compounded returns

Fig. 2.2 Criteria for selecting a retirement plan

Bonus: • Bonus is an important measure for choosing a retirement policy. Some companies pay bonus on the total money invested while others pay bonus on the premium amount. Terminal bonus: • In addition to yearly bonus, certain companies also pay terminal bonus. Life coverage: • A few companies supply life coverage to investors and are always the improved option compared to companies that do not. Compounded returns: • The interest payable is also simple or compounded. Since compound interest is always higher on a given main sum compared to simple interest, investing in a plan yielding compounded interest is preferable.

2.4 Factors Affecting Your Retirement PlanningThe key to retirement planning success is to begin early and gain the benefit of the power of compounding. To start with, first explain why you should start planning for retirement at a very young age. Following are the factors affecting your retirement planning.

Life expectancy

No government sponsored pension

plan

Medical emergencies

Nuclear families

Inflation

Job hopping

Factors effecting your

retirement planning

Fig. 2.3 Factors affecting your retirement planning

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Life expectancy: As of 2007 the life expectation at birth for males is 67 years and 71 years for females. With development in technology life expectancy is likely to increase. As a result, you will have to go for more number of years post retirement.

Medical emergencies: With age come health problems. With health problems come medical expenses which may makes a huge dent in your income post retirement. Failure here could guide you to liquidate (sell) your assets in order to meet such expenses. Remember Mediclaim do not always be sufficient.

Nuclear families: The days are gone when people use to have a complete cricket team making a family. Today’s youth prefer not more than two children. With westernisation coming in, the traditions of joint family are changing. They prefer freedom and stay away from their family. Therefore people have to develop a corpus to last them during their retirement without any help from family.

Inflation: As you require worrying about it you need to account for it as well. You need to take into account inflation while calculating your retirement corpus as well as your returns.

Job hopping: With youngsters hopping jobs frequently they do not get benefit of plans like super annuity and gratuity. Both these require certain number of working years spent in the service of an exacting employer.

No government sponsored pension plan: Unlike the US and UK where they have IRA (Individual Retirement Arrangement) and state pension respectively as social security benefit during retirement, the government of India does not give such benefits. So again it is your responsibility to fund your Retirement.

2.5 How Much would you Require at Retirement?There is no single number that would assure everyone a sufficient retirement. It depends on many factors counting your favoured standard of living, your expenses including any medical costs and your target retirement age. It is totally possible to decide a sensible number for your own retirement needs. All it involves is answering a few questions and doing some number crunching. As long as you plan ahead and estimate on the conservative side it is completely probable for you to collect a savings enough to last you throughout your golden years. Your first step in the procedure is to decide the amount you will need to maintain through your retirement. Research shows that normally 80 to 90 per cent of a person’s pre-retirement income suffices to preserve her/his current standard of living. You might argue that your standard of living is bound to go higher with raise in your income and so will the expenditure. Hence, you have to take into account raise in your annual income over the years. The components to be taken into account when calculating your retirement corpus/returns are:

your current age• expected age of retirement• life expectancy• years after retirement• current earnings• expected annual growth (in percentage) in income• annual income at retirement age• rate of return on retirement corpus (in percentage)• inflation rate (percentage)• inflation adjusted rate of return/real rate of return (in percentage)•

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After calculating your retirement requirement the next step would be to find the amount essential to save to reach there. The components involved to derive this figure are:

rate of return during accumulation stage (in percentage)• existing invested corpus• number of years to retirement•

2.5.1 Steps Involved in Determining the Requirement for Retirement PlanFollowing are the steps involved in determining the requirement for retirement plan:

Step 1: It is very significant to work out the intended expenses after retirement. Planned expenses vary from individual to individual and from one city to another.

Step 2: Listing of present wealth and investments gives an indication of the gap accessible between the actual earning potential and the preferred expenditure

Step 3: After identifying this gap plan investments hence which take closer to your preferred expenditures

Step 4: The risks concerned in these future investments are of fundamental consideration.

Step 5: A constant review of available investments helps to mix and match future retirement income plans.

Retirement advantage investment plans are offered by banks, non-banking financial institutes and government agencies. In many countries post offices also expand retirement investment plans.

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Summary A pension plan is an assurance by a pension plan sponsor to a plan member to supply a pension after your • retirement.Retirement planning basically is planning for a stable income after retiring from regular work.• Planning for retirement earning is best done throughout the course of regular job or practice.• In a defined-benefit plan the employer guarantees that the employee will be given a definite amount of benefit • upon retirement regardless of the performance of the underlying investment pool.In a defined-contribution plan the employer makes predefined contributions for the employee but the final amount • of benefit received by the employee depends on the investment’s performance.A pension created by an employer for the benefit of an employee is commonly referred to as an occupational • or employer pension.A retirement plan is an agreement to provide people with an income during retirement when they are no more • earning a steady income from employment.The key to retirement planning success is to begin early and gain the benefit of the power of compounding.•

ReferencesRetirement Planning, • [Online] Available at: <http://dadadadi.org/publication-retirement-plan.html> [Accessed 8 November 2011].Retirement Planning in India,• [Online] Available at: <http://www.madrasi.info/retirement-planning-in-india.html> [Accessed 8 November 2011].Menachery, G., 1987. • Retirement in India: a psycho-social study. Vianney Publications.Sinha, • Financial Planning: A Ready Reckone, Tata McGraw-Hill Education.Farrell, C., • Retirement Planning [Online Video] Available at: <http://www.youtube.com/watch?v= QQbq9aC9dt0>[Accessed 8 November 2011].marcellolisi, 2010. • How to Plan for your Retirement - Planning your Retirement - Early Retirement [Online Video] Available at: <http://www.youtube.com/watch?v=A8lg4mkiLzU>[Accessed 8 November 2011].

Recommended Reading Ezra, D., Collie, B. and Smith, M. X., 2009. • TheRetirementPlan Solution: TheReinvention ofDefinedContribution, 1st ed., Wiley. Munnell, A. H. and Sass, S. A., 2009. • Working Longer: The Solution to the Retirement Income Challenge, Brookings Institution Press.Ambachtsheer, K. P., 2007. • Pension Revolution: A Solution to the Pensions Crisis, 1st ed., Wiley.

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Self Assessment A ____________ is an assurance by a pension plan sponsor to a plan member to supply a pension after your 1. retirement.

pension plana. loan planb. investment planc. insurance pland.

__________ planning basically is planning for a stable income after retiring from regular work.2. Loana. Retirementb. Investmentc. Insuranced.

In which of the following plan the employer guarantees that the employee will be given a definite amount of 3. benefit upon retirement regardless of the performance of the underlying investment pool?

Defined-contributiona. Defined-loanb. Defined-benefitc. Defined-performanced.

In which of the following plan the employer makes predefined contributions for the employee but the final 4. amount of benefit received by the employee depends on the investment’s performance?

Defined-loana. Defined-benefitb. Defined-performancec. Defined-contributiond.

A retirement plan created by an employer for the benefit of an employee is commonly referred to as an 5. __________ pension.

employera. employeesb. consumerc. customerd.

State which of the following is true?6. Loan is an important measure for choosing a retirement policy.a. Bonus is an important measure for choosing a retirement policy.b. Retirement advantage investment plans are not offered by banks, non-banking financial institutes and c. government agencies.The safety concerned in the future investments is of fundamental consideration.d.

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____________ are a form of deferred compensation generally beneficial to employee and employer for tax 7. reasons.

Family pensionsa. Invalid pensionsb. Occupational pensionsc. Service pensionsd.

The key to retirement planning success is to begin early and gain the benefit of the power of _________.8. income a. Pension policyb. retirement policyc. compoundingd.

Which of the following is not a factors effecting your retirement planning?9. Compoundinga. Life expectancyb. Medical emergenciesc. Nuclear familiesd.

Which of the following is not a criterion for selecting a retirement plan?10. Terminal bonusa. Life expectancyb. Bonusc. Life coveraged.

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Chapter III

Funding Retirement

Aim


explain current financial status•

define net worth analysis•

discuss cash reserves•

Objectives


elucidate invested assets •

describe personal use assets•

analyse the cash flow•

Learning outcome


discuss debt reduction•

understand saving for retirement•

confer the impact of• inflation

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3.1 IntroductionIt is now proven that the ability to enjoy retirement will depend, to a great extent, on how well people have prepared financially. It is reassuring to know that people can meet the expenses of the lifestyle they choose and that people can meet unforeseen expenses as well. While, a financially secure retirement does not guarantee fulfilment, it builds a foundation that frees people from worry and concern. Therefore, people can get involved with things they enjoy, which will bring them fulfilment in their later years. It is fairly easy to assess their current financial condition. However, it becomes more difficult the further into the future they must look. There are a number of unpredictable factors to be considered such as the rate of inflation, changes in tax laws, their health, how long they will live, return on investments and health care costs. To deal with these uncertainties, people need to make some assumptions based on either historical data or statistical averages. Then, they need to update their plans from time to time as new information becomes available. It is important to recognise that their plans are only as accurate as the assumptions that go into them, and they are never final. With the help of this unit it is easier to analyse their current and post-retirement financial conditions. It is not intended to replace the service of a qualified expert. Rather, it provides a general overview and prepares people to meet with a financial planner.

3.2 Current Financial StatusThe place to begin an analysis of what people need to do for a financially secure retirement is to look at their finances today. This will give them insight into how they are spending their money, whether they are getting ahead and how much they have been able to save. To calculate your net worth, make a list of your assets and liabilities.

AssetsThe first step is to make a list of all your assets. Your assets are anything that you own that could be used to pay off debt. You’ll probably have three types of assets:

Liquid assets. Assets that can be turned into cash more or less immediately - current bank account balance, any • savings accounts, cash in jam jars, etc. Personal assets. The current estimated market value of your home, car, furniture, electronic equipment, jewelry, • books, CDs, and any other personal items that have monetary value.Investment assets. Stocks, bonds, and any other type of investment you may have.•

Your secret stashThink carefully about what you may have--you may have more than you think.

Accounts: Relatives often set up bank accounts in a child’s name, which, for one reason or another, sometimes • get forgotten and overlooked. Mutual funds: Mutual funds, including stock funds, bond funds, hybrid funds, U.S. funds, money market funds, • and so forth should be included when figuring your net worth. Stocks (Equities): Some families give shares of certain stock. • Bonds: Bonds are often given as contest prizes, birthday presents, or as part of scholarship packages in schools. • If you know of any bonds you have, or think you might have, track them down and include them.Emergency money: If you have emergency money, it should be included among your assets.•

LiabilitiesMake a list of all your liabilities. In contrast to your assets, liabilities are debts you have. There are two types of liabilities:

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Liabilities

Current Liabilities

Long-term Liabilities

Fig. 3.1 Types of liabilities

Current liabilities: Credit card debt, any outstanding loan balances, any money you’ve borrowed and need to • pay back within the year.Long-term liabilities: Your mortgage, car loans, student loans, and any other debt that you are repaying over a • long period of time.

Calculate your net worthTo determine your net worth, deduct your liabilities from your assets. Save your net worth chart and don’t despair. Things will change quickly, and it will serve as a reference point. Review and update your net worth each year. It will help you monitor your progress and might even serve as motivation to take better care of your finances.

3.3 Net Worth AnalysisThe first step in the analysis is to determine the net worth. This is a summary of the spending and saving habits. It shows the cumulative effect of financial decisions. It not only shows how people are doing, but also gives clues to potential changes to improve their financial future. In simple terms, net worth is the difference between what people owe and what people own. If people come out owning more than people owe, people have a positive net worth. If the opposite is true, people have a negative net worth. Net worth statements have common categories of assets and debts. Debts are generally divided into two categories:

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Debts

Secured Unsecured

Fig. 3.2 Types of debts

Assets are generally divided into the following categories:Cash reserve: • Cash reserve includes funds that are readily available in your banking accounts.Invested asset: • Fixed deposits, mutual funds, partnership, mortgages, real estate, annuities and retirement plans are nothing but invested assets.Personal use assets: • It includes home, furnishings, automobiles, recreational vehicles, furs, jewellery, collections, tools and equipments.

3.4 Analyse the Cash FlowCash flow is essentially the movement of money into and out of your business; it’s the cycle of cash inflows and cash outflows that determine your business’ solvency. Cash flow can be defined as the way money moves into and out of your business; it is the difference between just being able to open a business and being able to stay in business.

If a review of the net worth suggests something needs to be done to improve the financial situation, the best • way to understand the problem is to compare what people earn to what people spend. This is called a cash flow analysis.It gets to the basic question of how much of their income is spent on debt service, consumption and savings. It • also answers the question of how much more people are spending than earning or vice versa. It is not easy to get the necessary information to do a good cash flow analysis. One can start with their check book, credit card statements and tax records. The most difficult information to • get is what people spend on cash purchases. The best approach is to keep a journal for a couple of weeks to get a pattern and then estimate the amounts factoring in their personal experience.Income information should be available from their tax records. From the analysis of their cash flow statement, • people will know where their money goes and whether their outgo exceeds their income. Also, people can set goals and plans to overcome problems in their personal finances. These goals and plans become a budget or working guideline, for the coming year. It has been observed that many households live pay check to pay check world wide. This creates a problem. • They are never able to save anything to meet future financial needs. As a result, they may never be able to retire or, if they do, they will be faced with a meagre existence. By getting their income and outgo in balance, people can have a brighter financial future.

Cash flow analysisCash flow analysis is the study of the cycle of your business’s cash inflows and outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.

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Cash flow analysis involves examining the components of your business that affect cash flow, such as accounts receivable, inventory, accounts payable, and credit terms. By performing a cash flow analysis on these separate components, you’ll be able to more easily identify cash flow problems and find ways to improve your cash flow.

A quick and easy way to perform a cash flow analysis is to compare the total unpaid purchases to the total sales • due at the end of each month. If the total unpaid purchases are greater than the total sales due, you’ll need to spend more cash than you receive in the next month, indicating a potential cash flow problem.A cash flow analysis is a method of checking up on your firm’s financial health. It is the study of the movement • of cash through your business, called a cash budget, to determine patterns of how you take in and pay out money. The goal is to maintain sufficient cash for firm operations from month to month. This type of cash flow analysis is called developing the cash budget.Cash flow analysis is a method of analysing the financing, investing, and operating activities of a company. • The primary goal of cash flow analysis is to identify, in a timely manner, cash flow problems as well as cash flow opportunities. The primary document used in cash flow analysis is the cash flow statement. Since 1988, the Securities and • Exchange Commission (SEC) has required every company that files reports to include a cash flow statement with its quarterly and annual reports. The cash flow statement is useful to managers, lenders, and investors because it translates the earnings reported • on the income statement—which are subject to reporting regulations and accounting decisions—into a simple summary of how much cash the company has generated during the period in question.

The cash flow statementA typical cash flow statement is divided into three parts:

Cash flow statement

Cash from operations

Cash from investment activities

Cash from financing activities

Fig. 3.3 Cash flow statement

Cash from operations includes daily business activities like collecting payments from customers or making • payments to suppliers and employeesCash from investment activities include the purchase or sale of assets• Cash from financing activities include the issuing of stock or borrowing of funds. The final total shows the net • increase or decrease in cash for the period.

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Cash flow statements facilitate decision making by providing a basis for judgments concerning the profitability, • financial condition, and financial management of a company. While historical cash flow statements facilitate the systematic evaluation of past cash flows, projected (or pro forma) cash flow statements provide insights regarding future cash flows. Projected cash flow statements are typically developed using historical cash flow data modified for anticipated changes in price, volume, interest rates, and so on.To enhance evaluation, a properly-prepared cash flow statement distinguishes between recurring and nonrecurring • cash flows. For example, collection of cash from customers is a recurring activity in the normal course of operations, whereas collections of cash proceeds from secured bank loans (or issuances of stock, or transfers of personal assets to the company) is typically not considered a recurring activity. Similarly, cash payments to vendors is a recurring activity, whereas repayments of secured bank loans (or the purchase of certain investments or capital assets) is typically not considered a recurring activity in the normal course of operations.In contrast to nonrecurring cash inflows or outflows, most recurring cash inflows or outflows occur (often • frequently) within each cash cycle (i.e., within the average time horizon of the cash cycle). The cash cycle (also known as the operating cycle or the earnings cycle) is the series of transactions or economic events in a given company whereby:

Cash is converted into goods and services. �Goods and services are sold to customers. �Cash is collected from customers. �

To a large degree, the volatility of the individual cash inflows and outflows within the cash cycle will dictate the • working-capital requirements of a company. Working capital generally refers to the average level of unrestricted cash required by a company to ensure that all stakeholders are paid on a timely basis. In most cases, working capital can be monitored through the use of a cash budget.

The cash budgetIn contrast to cash flow statements, cash budgets provide much more timely information regarding cash inflows • and outflows. For example, whereas cash flow statements are often prepared on a monthly, quarterly, or annual basis, cash budgets are often prepared on a daily, weekly, or monthly basis. Thus, cash budgets may be said to be prepared on a continuous rolling basis (e.g., are updated every month for • the next twelve months). Additionally, cash budgets provide much more detailed information than cash flow statements. For example, cash budgets will typically distinguish between cash collections from credit customers and cash collections from cash customers.While cash budgets are primarily concerned with operational issues, there may be strategic issues that need to • be considered before preparing the cash budget. Generally speaking, the cash budget is grounded in the overall projected cash requirements of a company for • a given period. In turn, the overall projected cash requirements are grounded in the overall projected free cash flow. Free cash flow is defined as net cash flow from operations less the following three items:

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Cash used by essential

investing activities

Free cash flow

Normal dividend payments

Scheduled repayments

of debt

Fig. 3.4 Types of free cash flow

If the calculated amount of free cash flow is positive, this amount represents the cash available to invest in new • lines of business, retire additional debt, and/or increase dividends. If the calculated amount of free cash flow is negative, this amount represents the amount of cash that must be borrowed (and/or obtained through sales of nonessential assets, etc.) in order to support the strategic goals of the company. To a large degree, the free cash flow paradigm parallels the cash flow statement.Using the overall projected cash flow requirements of a company (in conjunction with the free cash flow • paradigm), detailed budgets are developed for the selected time interval within the overall time horizon of the budget (i.e., the annual budget could be developed on a daily, weekly, or monthly basis). Typically, the complexity of the company’s operations will dictate the level of detail required for the cash budget.Similarly, the complexity of the corporate operations will drive the number of assumptions and estimation • algorithms required to properly prepare a budget (e.g., credit customers are assumed to remit cash as follows: 50 percent in the month of sale; 30 percent in the month after sale; and so on). Several basic concepts relevant to all cash budgets are:

Current period beginning cash balances plus current period cash inflows less current period cash outflows �equals current period ending cash balances.The current period ending cash balance equals the new (or next) period’s beginning cash balance. �The current period ending cash balance signals either a cash flow opportunity (e.g., possible investment of �idle cash) or a cash flow problem (e.g., the need to borrow cash or adjust one or more of the cash budget items giving rise to the borrow signal).

Ratio analysisIn addition to cash flow statements and cash budgets, ratio analysis can also be employed as an effective cash • flow analysis technique. Ratios often provide insights regarding the relationship of two numbers (e.g., net cash provided from operations versus capital expenditures) that would not be readily apparent from the mere inspection of the individual numerator or denominator.

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Additionally, ratios facilitate comparisons with similar ratios of prior years of the same company as well as • comparisons of other companies. While ratio analysis may be used in conjunction with the cash flow statement and/or the cash budget, ratio analysis is often used as a stand-alone, attention-directing, or monitoring technique.

3.5 Debt ReductionConsumer debt such as credit card, credit union and in-house financing is a very expensive way to spend money. Interest is no longer deductible on the user’s income tax and the interest rate is substantial. If people want to make 15 per cent to 20 per cent on their money, simply pay off consumer debt and clear all credit card balances at the end of each billing cycle. If not paid on time, people can become bankrupt too. As a rule of thumb, don’t buy anything on credit that won’t last as long as the payments required to pay for it. Reducing debt increases net worth.

But where do people start? Logically, the debt bearing the highest interest should be paid off first. This includes all of the credit card balances they have been carrying. Another way to solve the problem, which brings greater psychological rewards is to pay off the smallest balances first.

Otherwise, people may become depressed over the seeming lack of progress. If their consumer debt is substantial, people may need to consider paying off high interest debt with less expensive money. Here are some potential sources of lower interest loans:

Borrow against securities in their brokerage account. People can deduct the interest as long as it doesn’t exceed • net investment income. Borrow against the cash value of their life insurance.• Refinance their home mortgage or add a home equity loan to turn non-deductible debt into deductible debt.• Borrow against their bank fixed deposits.• Borrow against their retirement account.•

Steps of reduction in debtsStep 1: Evaluate your debts: • Collect all your financial documents and print out your credit reports to see exactly where you stand. This is an important step toward debt recovery and one that people are often scared to take. On a piece of paper, write down the balances, interest rates, and monthly amount due for each of your debts. Include your auto loans, personal loans, payday loans, credit cards, and other debts. You should also make note of any annual fees on your credit cards. You don’t need to include your mortgage loan or student loans at this time. These loans have relatively long terms and low APRs so it is better to focus on paying off your other debts first. If you have an overwhelming amount of debt, you may want to request a free professional debt help consultation.Step 2: Look at your budget: • After you have collected the information about your debts, you should take a look at your monthly budget. Write down your monthly income after taxes and subtract your rent/mortgage payment from this amount and other monthly expenses such as childcare, student loan payments, insurance, utilities, and groceries. Once you have subtracted all of your expenses, calculate how much you have left to pay off your debts. If this amount is too small, look for ways to reduce your spending. Consider turning off your cable subscription or carpooling as ways to cut back temporarily. The more you can pay towards your debts each month, the sooner you will be debt free.Step 3: Make a plan: • Now that you know all about your financial situation, it’s time to create a plan for reducing your debts. Subtract your minimum debt payments (Step 1) and monthly expenses (Step 2) from your monthly income after taxes. The remaining amount should be used to pay off the debt with the highest interest rate and the highest balance. Continue this cycle each month until the debt is paid off and then move on to the next highest rate/balance account. This may seem like an odd process, but it is the fastest way to reduce your debts. During this time, you should not add any new charges to your credit cards. Also, try to increase the amount you pay toward the most expensive debt each month.

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Step 4: Start negotiations: • While you are starting to follow your repayment plan from Step 3, you should contact your creditors and lenders to see if you can improve the terms on your debts. You may be able to lower your interest rates or negotiate a reduced settlement on some debts by speaking with the customer service department. It is especially easy to negotiate the terms of debts that are charged off (dismissed) by the creditor or in collections already. Also think about moving some of your credit card debts to new accounts with lower interest rates. Moving a balance to a credit card with a 0% introductory rate for 6-12 months can help you save a lot on interest. Just be sure to keep each of your credit card balances below 35% of the credit limits to avoid damaging your credit score. During this time, investigate if consolidating your debts into a personal loan or home equity loan could help too.Step 5: Follow-through: • Do your best to meet your payment goals each month. It’s okay if the amount you put toward your most expensive debt each month varies. Just try to consistently put as much as possible toward your debts. Signing up for an automated payment system and keeping a chart of your progress on the refrigerator can help you stay on track. When you reach major milestones, be sure to celebrate your success.

3.6 Saving for RetirementIt’s important that you investigate all the options for funding your retirement. Sources of income include:

Pensions and Government Allowances (if you’re eligible)• Superannuation• Dividends from investments and mutual funds• Income from part time work or ‘retirement’ business ventures•

From all these sources, estimate how much money you’ll receive every year. How does this compare with how much you need to fund your preferred retirement lifestyle?

Retirement may be right around the corner or years down the road. Either way, if you want to retire comfortably, • it’s important to begin preparing or saving for retirement today.With today’s cost of living, saving money - let alone setting aside money to invest for retirement - can be a • challenge. The earlier you start, the better, but it’s never too late to begin. There are variety of products that can help you achieve your retirement goals, such as

Mutual funds

Retirement funding

AnnuityRetiremet savingIRA

Fig. 3.5 Sources of retirement savings

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Mutual funds provide a simple and convenient way to invest. They can help you achieve your financial goals • by offering diversification, growth potential and risk management. Each fund has its own specific objectives that the portfolio manager works to achieve, such as long-term growth or income.An annuity is a contract between you and your insurance company designed to provide income when you retire. • Annuities can help you save money on a tax-deferred basis; you pay no taxes on the earnings until you begin to withdraw the money. Depending on your needs and objectives, different types of annuities are available:

A fixed annuity has a fixed rate of interest, with a guaranteed1 minimum interest rate that ensures the growth �of your annuity will never be below this rate. This type of annuity may appeal to you if you have a low risk tolerance and are nearing retirement.A variable annuity may provide greater tax-deferred growth potential for your money because you may �allocate your premium across a range of investments. A variable annuity can be a great option if you are accumulating money for retirement.

Successful retirement funding and estate preservation requires harmony between your personal goals for your • estate and your estate assets. Your insurance agencies can help you identify your goals and provide a detailed analysis that addresses retirement funding; estate tax issues; potential education, long-term care and disability costs; and life insurance needs to help you achieve your personal goals in preserving your estate.IRAs are a tax-advantaged way to save for retirement. Finding the best IRA for you depends on your financial • objectives, income level, length of time before retirement and more.

3.7 Estimating the NeedsThe starting point is to estimate the income level people will need after retirement to live the lifestyle they are accustomed to, taking into account changes retirement will bring. Start by working on a detailed budget for their current living expenses. Then, adjust each item based on how people think their retirement lifestyle will affect it, will it go up, remain the same, or go down.

3.8 The Impact of InflationPeople now need to adjust their estimated post-retirement needs for inflation. Although people don’t know what future inflation will be, they can look at what it has been in the past and use their judgment to pick a rate for planning purposes. The amount of personal savings they will need to fund their retirement depends on several variables including inflation, return on investments and how long people will live. People already have an assumption about inflation. They can now summarise the savings required to fund their retirement income needs. As a result of these calculations, people should have a good idea of their prospects for a financially secure retirement. However, if the amount required to fund their retirement income needs seems out of reach, here are some alternatives:

Delay the retirement so as to allow more time to add to their savings and reduce the number of years for which • others need to provide help.Review the post-retirement budget for expenses that can be reduced.• Review the assumptions about rates of return on their savings. Perhaps, a bit more risk is required.• Consider working part-time to supplement the income.•

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SummaryWith planning and commitment, people can have a financially secure retirement.• Making a post-retirement budget is a good place to start the planning process. From the budget, people can • determine their financial needs.Most retirements are funded with a combination of pension income and personal savings.• People can estimate pension income and social security and then determine what is required from personal • savings.People should not overlook inflation in their calculations. It will continue to be a factor in the economy.• Plans must be updated as new information is available.• Cash flow analysis is the study of the cycle of your business’s cash inflows and outflows, with the purpose of • maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.Mutual funds provide a simple and convenient way to invest. They can help you achieve your financial goals • by offering diversification, growth potential and risk management. Each fund has its own specific objectives that the portfolio manager works to achieve, such as long-term growth or income.An annuity is a contract between you and your insurance company designed to provide income when you retire. • Annuities can help you save money on a tax-deferred basis; you pay no taxes on the earnings until you begin to withdraw the money.IRAs are a tax-advantaged way to save for retirement. Finding the best IRA for you depends on your financial • objectives, income level, length of time before retirement and more.

ReferencesKaplan, L. J., 2004. • Retiring right: planning for a successful retirement, Square One Publishers.Tyson, E., 2008. • Investing for Dummies.Farm bureau financial services. • Retirement services [Online] Available at: <http://www.fbfs.com/content/investments/retirement-funding/default.aspx> [Accessed 22 July 2011].Your money and finance retirement planning. • Funding retirement [Online] Available at: < http://www.your-money-and-finance.com/funding_retirement.html> [Accessed 22 July 2011].Retirement funding now, 2008. • Retirement Funding Now.com – Introduction. [Video online] Available at: < http://www.youtube.com/watch?v=krKuQSRSeK4> [Accessed 22 July 2011].Ramsey, D. • Retirement Investment Money Makeover. [Video online] Available at: <http://www.youtube.com/watch?v=cTxrygfOVgI> [Accessed 22 July 2011].

Recommended ReadingDonogue, W. E., 1987. • Donoghue’s Investment Tips for Retirement Savings, HarperCollins.Ameriks, J. 2008. • Recalibrating Retirement Spending and Saving, Oxford University Press.Baldwin, B. G., 2001. • The new life insurance investment advisor, McGraw-Hill Professional.

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Self AssessmentThe ability to enjoy retirement will depend, to a great extent, on how well people have prepared__________.1.

financiallya. mentallyb. psychologicallyc. physicallyd.

State which of the sentences is true?2. A financially secure retirement does not guarantee fulfilmenta. A financially secure retirement guarantee fulfilmentb. The first step in the analysis is to determine the current financial status.c. Assets are divided into five categories.d.

If people come out owning more than people owe, people have a______________.3. negative net wortha. positive net worthb. neutral net worthc. net worthd.

If people come out with less than people owe, people have a _______________.4. positive net wortha. neutral net worthb. negative net worthc. net worthd.

Debts are divided into _________ and ________.5. permanent, temporarya. secured, unsecuredb. positive, negativec. fixed, floatingd.

Cash reserves assets include _______________.6. fixed deposits, bonds.a. real estates and retirement plansb. home automobiles.c. funds available in bank accountd.

Invested assets include _______________.7. real estates and mutual fundsa. home, automobilesb. jewellery and collectionc. toolsd.

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Personal use assets include which of the following?8. Real estates and mutual fundsa. Partnershipb. Funds in bank accountc. Furnishings and automobilesd.

Comparing what people earn to what people spend is called _____________. 9. positive net wortha. negative net worthb. a cash flow analysisc. current financial statusd.

People need to adjust their estimated post-retirement needs for __________.10. inflation a. pensionb. secured debtc. cash flowd.

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Chapter IV

Investing the Retirement Savings

Aim


explain risk elements•

define how diversification spreads risk•

discuss the magic of compounding•

Objectives


explain the investment strategy •

classify allocation of savings among the choices•

explicate guidelines to reach the goals•

Learning outcome


discuss on mutual funds•

enlist the methods of compensation •

converse investment tips•

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4.1 IntroductionIf there is a key to successful investing, it is to keep it simple and go for long term investment. This is a tough strategy to maintain because so many financial advisors try to sell investment opportunities that are too complex for the average person. And if you do not understand it, they will, likely make wrong decisions about it. The average investor will do well with a couple of good stock mutual funds until nearing retirement. There are three basic principles of investing:

How diversification moderates risk?

risk and how risk regulates the rate of

return

Growth through compounding, which is even better when it

is tax deferred.

Principles of Investing

Fig. 4.1 Principals of investing

4.2 Risk ElementsAny investment strategies have certain risk. Even if you put the savings in a safe deposit box, you will lose it as inflation erodes its purchasing power. To earn a positive net rate of return, it is necessary to take some risk. There are four types of risk to plan in developing the savings strategy discussed below:

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Market Risk

In this type of risk, people will not be able to sell their • investment for what people paid for it.•

Under this risk, business will suffer as money invested will not • recover.

This is the risk, where the investment will decline in value as • interest rates fluctuate.

This is the risk where people will not be able to get their • money from the investment when they need it.

Business Risk

Interest Rate Risk

Liquidity Risk

Fig. 4.2 Types of risks

There is a direct relationship between risk and rate of potential return. Just like a lottery, when the potential return is high, so is the risk. You should understand the different types of risk and how they affect rates of return. Take only as much risk as needed to meet the savings goal.

4.3 Diversification Spreads the RiskDiversification is the best way to moderate risk. It is done on two levels. The first is asset allocation; spreading • their savings among three basic categories:

cash equivalents �income investments �growth investments �

The portion of your total investment in each category depends on the savings goal and the time available. Asset • allocation will help moderate market risk. When you need to withdraw savings, you can choose the best category at the time. Further diversification within • categories minimises exposure to business risk. It recognises that within an asset category, some investments will do well while others will not. • Unfortunately, they do not know ahead of time which one to choose. Interest rate risk affects investments such • as preferred stocks, utility stocks and bonds. To minimise exposure, concentrate on top quality investments and hold until maturity. Liquidity risk is greatest • with real estate. As a general rule, invest only in real estate when you can wait until the right time to get their money back.•

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4.4 The Magic of CompoundingThere is no other source with the potential to contribute as much to your savings as compound interest; neither you, nor your employer. But to get maximum benefit, it is necessary to start early. For example, if you want to have a certain amount when you retire at age 60, it is necessary to calculate the savings needed at different ages.

4.5 Determining an Investment StrategyFour factors should be considered when deciding on their investment strategy. These factors are explained below along with a pictorial presentation.

What are the objectives?

How long do people have?

What is the risk tolerance?

What are the financial

circumstances?

Fig. 4.3 Factors affecting investment strategy

What are the objectives?Consider the importance of stability of principle, predictability of income and capital growth. These must be • considered against the risk and reward potential of the three categories of investment alternatives. To have maximum stability of principle, you could invest in cash equivalents. However, the income would be • unpredictable due to the variation in short-term interest rates and inflation could erode your purchasing power. For higher predictability of income, invest in bonds. For doing this, it is necessary to take on interest rate risk in the event needed to dip into your savings before • some bonds reached maturity. There would also be some exposure to loss of purchasing power through inflation, although not as severe as with cash equivalent investments. You could put your savings in stocks or a stock mutual fund. This choice has provided substantial growth of • both income and capital over long periods of time. But, with wide unpredictable price swings you might get exposed to market risk, if you are required to draw from savings in excess of current dividends.

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How long do people have?Time gives two advantages. If you have time, then you can wait until there is swing in the stock market and can • often settle for a lower rate of return, because the effects of compounding will work more to your favour. Therefore, the time which you have before spending savings and the flexibility, if any, will point toward • particular classes of investments.

What is the risk tolerance?Investors can be labelled as conservative, moderate or aggressive depending on the amount of risk they can • comfortably handle. The rule: Do not take on more risk than you can sleep with. Staying awake at nights, worrying about your • savings is no way to either anticipate or enjoy the retirement.

What are the financial circumstances?If people have ample savings to cater the needs, they may be able to take additional risk and not substantially • affect their financial status. However, if people have limited resources, it might be better to concentrate on less risky investments in order • to preserve what they have.

Retirement planning should stand out as the most important financial goal in an investor’s financial planning exercise. Where to invest for retirement is an often asked question. The answer is pretty simple if you understand goal based investing. Hop over to it now if you haven’t read through it. Once back, it should be very clear to all of us that retirement is a long term financial goal and understanding where to invest for retirement is not a difficult task at all.

Where to invest for retirement?Since retirement planning is long term in nature, the best bet is equity investment. Equity has known to return the most among all asset classes, however, only over a long period of time – long term investing is the key here. Do not take exposure to equity if you want to make quick gains.

In equity, buy direct stocks if you have the capability to stomach the ups and downs of the stock market and • can understand the financials of a company. If you cannot, go in for equity mutual funds. Mutual funds are the easiest way to riches for the small investor, so take best advantage of it. Opt for systematic investment planning when you go for the mutual fund route.Obviously you cannot take full equity exposure at any given point in time. There is some debt that needs to be • thrown in your portfolio as well. The best retirement planning tools in debt are public provident fund (PPF) and New Pension Scheme (NPS). These are the safest long term products meant for retirement. Avoid putting your money in other debt avenues like fixed deposits and bonds. The returns after tax are pathetic – such products are not meant for long term goals like retirement at all. It is important to understand that one could still end up using these avenues but this might not be the most efficient way to do so.Another avenue to explore could be real estate. In line with your asset allocation, one should buy real estate to • generate some passive income in the form of rentals during retirement. This could be useful given the fact that you would stop bringing home your pay packet after 60. Real estate also appreciates over a long period – it is second in line after equities as far as returns are concerned.It is essential that having a second source of income helps a lot after you retire. Rental yields could possibly be • one such source of income. Do look at real estate for building a corpus for retirement.

4.6 Allocating Savings Among the ChoicesMany investment choices are available. Some guarantee the return of capital with interest after a set time period, • while others do not guarantee. This leaves many people unsure about where to invest their retirement savings. Those who are concerned with preserving capital see their purchasing power eroded by inflation. Those concerned • with maximising returns to build capital may see their savings disappear to risky investments.

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4.7 Guidelines to Reach the GoalsOne who experiences success in saving for a financially secure retirement follows some specific guidelines. See if they are guided by a successful strategy.

Start by eliminating all consumer debt.• Set up a regular program to add to the savings monthly. Use payroll deductions, systematic transfers from your • checking account or (at least) mark on the calendar to send in a check.Take full advantage of employer-sponsored plans. These plans not only offer tax-deferred compounding, but • frequently offer employer matching of all or a portion of your contributions.You should not spend your retirement savings on other things. If they change employers, roll the retirement • savings over into the new employer’s retirement plan.Before retirement, invest for growth. After retirement, shift into income investments to conserve capital and • meet income needs.

4.8 Mutual FundsA mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.

Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But, the biggest advantage to mutual funds is diversification, by minimising risk and maximising returns.

Unit Holders

Savings

Investments

Returns

Trust

AMC

Units

SEBI

Registrar

Trust

Custodian AMC

Fig. 4.4 Working of mutual fund(Source: http://www.mutualfundsindia.com/mfbasic.asp)

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Mutual fund chargesThere are four types of potential charges to mutual fund investors.

Potential charges

Cash for Front end loads

m operationsBack end loads No load funds All funds

charge

Fig. 4.5 Types of potential charges to mutual fund investors

Some funds have front-end loads of two percent to eight percent of their initial investment. This is, generally, • used for paying commission to the person who sold the fund. Some funds have back-end loads of one percent to six percent on money taken out. These charges are often • on a declining schedule so that if people leave their money with the fund for say five years, there is no longer a charge. No-load funds do not impose any charges. • All funds charge an administration fee for handling their investments, although the charge varies, usually rising • to 1.5 percent. This is a Securities and Exchange Commission regulation that allows a fund to pass on certain advertising and • marketing expenses. Many funds include these expenses as part of their administration fee. When considering a mutual fund, be sure to consider all the costs against the fund’s performance history. What have been the net results?

Reasons for investing in mutual fundsMutual funds appeal to a large number of investors for many valid reasons explained below:

Diversification• Investment is pooled with others and spread among a large number of securities. This reduces the potential �for any one investment having a significant negative effect on the total portfolio.

Professional management• Few investors have the time or knowledge to analyse companies and securities, study forces that influence �the economy and assess trends in financial markets. With mutual funds, individual investors gain access to professional portfolio management at bargain rates.

Liquidity• Mutual fund shares can be sold at any time at their current market values. They are subject to market risk. �

Convenience• People can add to their mutual fund holdings at any time. Additionally, recordkeeping is simplified by �the periodic reports and tax information provided. Withdrawals are also convenient. Customers receive a monthly check while others offer check-writing privileges.

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Types of stock fundsStock mutual funds are generally classified as follows:

Income funds • Growth and income funds • Growth funds•

Income funds

Growth and income funds

Growth funds

Invest in common and preferred stocks of • established companies that have a history of paying above-average dividends.

Invest in the stock of blue chip companies • that combine steady growth with good dividends.

Invest in common stock of companies whose • earnings have grown faster than the rate of inflation or the general economy and they reinvest most of their earnings in further growth.

Fig. 4.6 Types of stock mutual funds

An easy way to invest in stock mutual funds is to buy an indexed fund.

4.9 Hiring a Financial AdvisorAt some point, one will probably need the services of a financial advisor. Depending on the understanding of financial matters, one may need answers to tax questions or a complete saving and spending plan. When you start looking for a financial advisor, you will find no shortage of candidates. However, finding one that meets your needs may be a challenge.

4.9.1 Methods of Compensation

Financial advisors are paid for their services in one of the following three ways. It is important to understand • how an advisor is paid.

Hourly fee � : Fee-only advisors charge for the time spent with a client and working on the client’s business. Total charges can become substantial for a comprehensive plan and implementation.Sales commissions: � Some advisors offer free planning service with an expectation of making a commission on the investments one selects. If you choose this type of advisor, be sure of his or her qualifications and that the investments offered fit the needs.Combination: � Some advisors calculate a fee based on the time spent on their business. Then, the customer may choose to pay the fee and go elsewhere to implement their plan; or, if they buy investments from the advisor, any commissions received are credited to their account.

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Most investors prefer this approach as it offers some savings along with freedom to choose who handles your • investments. Good financial planning is a combination of analysis and application tailored to the specific needs and circumstances of the investors. It is not a sales approach for marketing investment products. Therefore, customers need to sort out the method of compensation that suits situation the best.

4.9.2 Choosing an AdvisorWhen you decide to hire a financial advisor, start by checking with others for recommendations. Then, schedule meetings with two or three to see which one fits the best to their needs. Here are some questions to ask on your first visit:

What is the background and experience?• What degrees and designations do they hold? Look for someone who holds one of the three designations • mentioned earlier. While there is no guarantee of qualification, you can check indicators of their education and experience.Consult other professionals. Seldom is one person an expert in everything. Expect an advisor to consult with a • CPA, insurance specialist, investment advisor, estate attorney and a tax attorney in developing a comprehensive plan.How do the advisors charge for their services? You need to know if there is any chance of advice being tainted • with greed.What are their typical client’s financial circumstances? One needs an advisor who deals with every client in • the same way.

4.10 Professional Money ManagersIf your retirement savings is more, it is necessary to consider professional money management. A professional money manager will handle all your investment account as per your requirements. You will pay fees for this service, but the benefits will be well worth the cost.

The first thing a professional money manager does is helps you to define the goals and risk tolerance. This • information is converted into a long-term strategy that can sustain you through various markets. From this preliminary work, an investment plan is formed that accommodates both, your long-term goals and short-term needs, based on the tolerance for risk. A professional manager has time and training to manage your assets successfully. A trained professional takes • the emotionality out of investing, knows the appropriate investment vehicles to achieve your goals and can manage risk within the portfolio by choosing the proper balance of investment choices. This service will cost from one to two percent of your account balance annually. When choosing a professional money manager, become acquainted with the management team that will handle • your accounts. Look at how long they’ve been in business, the size of accounts they handle and their track record. They want someone who handles accounts similar to yours and has demonstrated success.

4.11 Investment TipsFor building a good individual portfolio you need to put you capital,, time and professional advice. Some people are better suited to do this than others. Keeping money hard at work with good results is not easy, but if one chooses to manage their own investments, here are some tips that can prove to be helpful.

Stay within the comfort zone. To most people, sleep is more important than gambling for a higher return on an • investment. Their comfort zone may move toward the conservative in the years ahead.No one has all the answers. Financial markets are influenced by so many factors that no one can predict beyond • an educated guess.Seek professional help. Make your own decisions. Second opinions are advisable. Refrain from becoming • dependent on one advisor.

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Update your knowledge from time to time. Study the current scenario so that even in troublesome situations, • you can take wise decisions to save your retirement savings.No matter how much you know about investments, keep learning. The financial world is constantly changing. • If you cannot keep a track of the current financial market, then make sure your advisor helps you in doing it.

Investment strategyFollowing are the points to be considered while investing:

What are your goals and objectives?• The first step in developing a solid savings and investment plan is to decide what you want your money to �do for you. When you think about your financial goals, it’s important to be as specific as you can. Start by making a simple list of all your financial goals. By identifying and prioritising your goals—such as �buying a new home, paying college tuition for your children, and funding a comfortable retirement—you can help ensure that the investments you select are appropriate to help you achieve each of your goals.

What is your time frame?• How long do you have until you’ll need your money? Setting time frames for each of your goals is key �because it can help determine how long your money can be working for you. Some of your goals, like saving for a vacation, may be short term and less than 4 years away. Others, such as funding college or saving for retirement, may be longer term and more than 10 years away. That’s why it’s important to remember that an investment which may be appropriate in helping you achieve a longer-term goal may not work as effectively for those that are shorter term. Determining a time frame for each of your goals will guide you as you select your investment options.Regardless of your age or how much money you have to invest, your chances of reaching your goal will be �much greater if you start today to build your financial future. That’s because the sooner you start investing, the less money you may need to invest and the longer your money has to grow.

How much money do you have?• Before you make any decisions about investing, you need to assess where you are currently relative to where �you want to be. Begin by taking a “financial inventory” to determine how much money you have to invest and how your other assets are already allocated. Don’t forget to consider assets such as:

How much money do you need?• Quantifying your financial goals—in other words, determining how much money you’ll need in the future—is �important because it can help determine how much money you’ll need to put aside now to accomplish your goals. The type of investment you select and your time frame will substantially impact the amount of money you’ll need to begin saving for your goal.

What kind of investor are you?• Along with determining your financial goals and your time frame, you’ll want to also consider what type of �investor you are. No matter what type of investment you select, there are certain risks and potential rewards associated with it. Depending on the amount of time you have until you need your money, some of those risks may be more �acceptable than others. If you’re like many investors, you may invest more conservatively for your shorter-term goals and more aggressively when your goals are farther into the future.

Principles for the common sense investorWise investing can be done by anyone so long as they employ the right principles. Here we list ten of the most important principles of investing which can be understood and used by anyone with basic common sense.

Put your money to workInvesting is about putting money to work in effective ways to make more money. The most effective way to put your money to work over the long term is in well-run, profitable companies. Companies that are good stewards of your money, will help you create a level of wealth that you couldn’t generate by merely saving your money.

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Investing is not a gameMany people mistakenly think of investing in the same way they think of sports or gambling: as a game. But investing is not a game. Your goal is to make more money, and it turns out that over the long-term, there are intelligent and rational strategies for growing your money.

Risk is relativeIt is not uncommon for financial advisers to give very bad advice. While your balance won’t erode, the purchasing power of your money could due to inflation and taxes. Over periods of time that are greater than three years, the common sense investor understands that, ceteris paribus, the best place for money is in stocks.

Invest in good companies, avoid bad companiesThe common sense investor entrusts his money in companies that put money to good use. Good companies will use money in effective ways to produce more wealth. One of the best ways to identify good companies is to look at their Return on Equity, which is essentially a measure of how well they create profits using shareholder investments.

Don’t pay too much for a good thingEven if you’ve found a good company, don’t invest in the company unless it’s being sold at a reasonable price. Ideally, try to find good companies that are selling at a discount. Often times, you will have to go against the flow and buy into companies that are out of favor for one reason or another (often irrational) with investing professionals.

Fear the following of fadsFollowing the crowd can be disastrous for the common sense investor. More often than not, it results in paying way more than a company is worth. If the price of a company is dictated by short-term exuberance rather than long-term rationality, it should be avoided. In fact, the common sense investor can take advantage of the fact that in the short term, stock market exuberance is often irrational. If the boys on Wall Street are too extreme in a sell-off for a good company, you should be ready to buy.

Time is on your side: the power of compounding interestGive your money as much time to grow as possible. The earlier you put your money to work, the longer it works for you, and the more wealth you generate. It makes a lot of sense if you think about it. Wealth is generated via production. The longer your money works in good companies, the more time it has to produce further profit; profit which you get to share. The cool thing is that you can put all of your profit back to work, and effectively have more money generating more profit. This process can keep iterating so long as you don’t withdraw your money.

Some debt is good debt, but most debt is badMany people make the mistake of trying to pay down their home mortgage early, but this is often unadvisable for several reasons. First of all, the money you pay towards your mortgage is not liquid and gets tied up in your home until you sell. Second, mortgage is often tax-deductible. You can’t take advantage of this tax break if you avoid the interest.

Never sustain credit card debt and try to avoid all debt that will be used to purchase items that depreciate (e.g. cars, clothes, toys). Debt can be emotionally and psychologically difficult to sustain so only carry good debt if it doesn’t affect you aversely.

Keep it simpleUnderstand the company’s business model: how they make money. If the business model seems odd or complicated or unfocused, avoid the company, even if it means that you have to avoid the temptation of following the crowd. Companies make money by producing products and services that people or businesses want and need. Make sure you understand what products and services your company are producing and developing for profit.

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Employ disciplined principlesInvest regularly and intentionally. Force yourself to put your money to work, but don’t just throw your money at any investment. Choose your investments wisely. Don’t chase after fads. Fight your emotions. If you feel like selling (the market is doing badly), you should probably consider buying and if you feel like buying (the market is doing well), you should probably consider selling.

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SummaryIf there is a key to successful investing, it is to keep it simple and go for long term investment.• Any investment strategies have certain risk.• There is a direct relationship between risk and the rate of potential return.• A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool • their money together with a predetermined investment objective.Mutual funds are considered as one of the best available investments as compared to others.• Investment is pooled with others and spread among a large number of securities. This reduces the potential for • any one investment having a significant negative effect on the total portfolio.At some point, one will probably need the services of a financial advisor. Depending on the understanding of • financial matters, one may need answers to tax questions or a complete saving and spending plan.A professional money manager will handle all your investment account as per your requirements.• For building a good individual portfolio you need to put you capital, time and professional advice.•

References Gibberman D.L., 2002. • Planning to retire in comfort, 4th ed., CCH.Morries V.B. & Morris K.M., 2011. • Investing for Retirement, Lightbulb Press.ICRA Online. • Mutual Fund Basics [Online] Available at: < http://www.mutualfundsindia.com/mfbasic.asp> [Accessed 25 July 2011].Master your money. • Where to invest for retirement planning? [Online] Available at: < http://www.thewealthwisher.com/2011/01/11/where-to-invest-for-retirement-planning/> [Accessed 25 July 2011].Investing insurance. • Investing and Retirement Planning Tips: Personal Finance 101 (Part 1). [Video online] Available at: <http://www.youtube.com/watch?v=4waUNTIq-fg> [Accessed 25 July 2011].Financial Straight Talk, 2009. Financial Investment Retirement Plan: 401k, Bonds, Mutual Funds. [Video online] • Available at: <http://www.youtube.com/watch?v=Po_q0dJcMOY> [Accessed 25 July 2011].

Recommended ReadingGarrett, S. and Cornell, C., 2010. • 76 Tips for Investing in an Uncertain Economy For Canadians For Dummies, Camilla Publisher.Huang, N.S. and Finch, P., 2002. • The Smart Money guide to long term investing: how to build real wealth for retirement and other future goals, 2nd ed., John Wiley and Sons. Graney, P. J., Storey J.R., Purcell, P.J. and Gravelle, J.G., 2003. • Retirement Savings Plans, Nova Publishers.

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Self Assessment______________ is the risk that people will not be able to sell their investment for what people paid for it.1.

Market riska. Business riskb. Interest riskc. Liquidity riskd.

______________ is the risk that the business people have invested in will not do well. 2. Market riska. Business risk b. Interest risk c. Liquidity riskd.

______________ is the risk that their investment will decline in value as interest rates fluctuate.3. Market riska. Business risk b. Interest risk c. Liquidity riskd.

______________ is the risk that people will not be able to get their money from the investment when people 4. need it.

Market riska. Business risk b. Interest risk c. Liquidity riskd.

Which statement is true?5. There is an indirect relationship between risk and the rate of potential return.a. There is a direct relationship between risk and the rate of potential return.b. There is a direct relationship between risk and the profit.c. There is a direct relationship between investment and the rate of potential return.d.

____________ is the best way to moderate risk.6. Investmenta. Risk managementb. Diversificationc. Potential returnd.

______________ will help moderate market risk.7. Asset allocationa. Investmentb. Diversificationc. Interest riskd.

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______________ affects investments such as preferred stocks, utility stocks, and bonds. 8. Market rate riska. Interest rate riskb. Compound interestc. Stock marketd.

__________ can be labelled as either conservative, moderate, or aggressive depending on the amount of risk 9. they can comfortably handle.

Retired persona. Stock marketb. Investorsc. Employerd.

A ____________ is an investment company that pools the money of many investors and invests it on their 10. behalf.

stock marketa. stock fundsb. mutual fundsc. income fundsd.

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Chapter V

Spending Retirement Savings

Aim


explain the squeeze and spend strategy•

introduce the concept of spending retirement savings•

discuss the modest cushion and relax strategy•

Objectives


explain the big-cushion / save-save strategy•

define the capital protection / spend-interest strategy•

describe the actuarial strategy•

Learning outcome


enlist the advantages and disadvantages of all the retirement spending strategies •

understand the tools to help plan their spending•

discuss the long-term financial strategy•

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5.1 IntroductionMost investors want a comfortable retirement. Yet many investors, particularly the baby boomers, could do a better job of planning for this most important of goals. Ultimately, financial planning isn’t just about rates of return or picking the right stocks. It is about peace of mind and achieving your dreams. Nowhere is this more important than in planning for a retirement that lets you spend reasonably, with confidence. Of course, the key is to have a plan in the first place. But, how do you go about estimating your needs for something like retirement spending, particularly if retirement is still far into the future?

Everything on financial planning seems to be related to creating and enhancing retirement income. The emphasis is on having enough money; this is Phase I. At some point people need to consider how to use what they have accumulated (no matter how small); this is Phase II. Wise spending to enrich retirement, not saving, is perhaps the real financial challenge.

Cash flow: The key to a comfortable retirement Retirement planning boils down to cash flow. How much money do you need to spend each year to meet your obligations and still maintain the standard of living you desire?

During your working years, you maintain yourself primarily by earning an income. In retirement, you’ll likely rely heavily on your financial portfolio. Retirement planning involves three steps:

Determine your retirement spending needs.• Figure out how large your portfolio must be to fund your retirement spending.• Calculate how much you need to save and invest now to reach your retirement portfolio goal.•

Read all of the following strategies before deciding which one is best suited to their desires, philosophy, values and financial situation. The more people discuss these options, the better. To be happy with their ultimate choice it should fall within their personal comfort zone and have a positive impact on their lifestyle.

Following a discussion of the strategies, additional information on tapping their home equity for retirement living expenses, tools for estimating their spending level and tax rules and penalties that affect their tax-deferred retirement accounts are discussed. All of these items are important to their Phase II planning.

5.2 The Squeeze-and-Spend StrategyRetired people with limited incomes and small nest eggs do not have a wide range of strategies. Nevertheless, it is necessary to follows one of the best suitable strategy. In fact, it could be argued that the less money accumulated in Phase I, the more a good plan for Phase II can accomplish.

The squeeze-and-spend strategy says that you should make renewed efforts to squeeze out more disposable income from your present income and what you save should be spent on things that put more style in their life. This approach may appear to be high risk, but remember they are spending money they would otherwise not have unless they economised.

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Advantages to this strategyNot all retirees are • conservative. Many enjoy life living it up.This strategy provides a • motivating goal. Saving money to receive immediate rewards is motivating to some people.In this strategy, there is • nothing to lose. Retirement income is modest and people cannot do anything about it.

The squeeze and spend strategy

Disadvantages to this strategy

No feeling of security. • To live without a small cushion falls outside the comfort zone of many retirees.No contingency fund. If the TV • needs repairing, people can’t pay the bill until people save something.Dependency on government. • Without a cushion, it might be necessary to ask for help from a social service agency.

Fig. 5.1 Advantages and disadvantages of squeeze and spend strategy

5.3 The Squeeze-and-Save StrategyThis plan is similar to squeeze-and-spend and also applies to retirees with modest incomes. It is specifically designed for those who enjoy saving more than spending and are happy building a nest egg. Investors who prefer to cover themselves with a security blanket of savings should opt for this strategy.

Advantages to this strategyThis strategy provides a • feeling of financial security: Money in the bank provides peace of mind.A motivating goal for some; • saving money is a reward in itself for some individuals.Money available for • emergencies; provides a sense of independence no matter what happens.

The Squeeze and Save Strategy

Disadvantages to this strategyLoss of immediate • rewards; people who save rather than spend lead more restrictive lifestyles.Possibility of fewer friends; • a few individuals are so motivated to save that they chase their friends away; they often turn down social events because of the cost.Money saved may be • worthless lately; under inflationary conditions, money saved now will buy less lately.

Fig. 5.2 Advantages and disadvantages of squeeze and save strategy

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5.4 The Modest-Cushion-And-Relax StrategyIt is easy to envy those adopting this strategy. Frequently, retirees holding this policy calculate how much money they think they will need for a comfortable cushion. Then they invest or bank that sum.

Once they have their personal cushion, they cease to worry about money. From that point on they buy necessities, pay bills and enjoy life, spending whatever their monthly retirement income may be.

Advantages to this strategyThis strategy provides both • security and discretionary income. For many it seems to be right combination.It also helps in • increasing your savings.You can spend discretionary • money by enjoying every moment. With a cushion, it’s easier to enjoy spending money unwisely.

The Modest Cushion and Relax Strategy

Disadvantages to this strategyCushion investments can • turn sour. Some people lose a good cushion through unwise investments.Figuring the right amount may • be a problem. Some retires keep changing their minds when they get close to a predetermined cushion amount.They never reach a point where • they can relax and start spending.Spending cushion money for • emergencies is difficult. A cushion is designed for unexpected expenses, but many find it painful to use when the time comes.

Fig. 5.3 Advantages and disadvantages of modest cushion and relax strategy

5.5 The Big-Cushion/Save-Save StrategyRetirees subscribing this strategy often do so with little forethought. They probably had good luck during Phase I (accumulating wealth). They enjoyed the process so much and their egos were so gratified that they have trouble switching to Phase II.

No matter how large their cushion, it is never enough. As a result, they spend their retirement investing and reinvesting. They frequently live very economically. Even though they know they can’t take it with them, they enjoy making it too much to give it up. Investing and saving become not means to an end but ends in themselves. Often these people are wealthy and ultimately wish they had given more consideration to other strategies.

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Advantages to this strategyExcellent sense of security. • Although big-cushion people frequently admit they are hooked on money, they say the size of their security blanket is responsible for most of their happiness. Ego rewarding. Making and saving money is a form of personal fulfilment for some. It is how they get their “kicks”.They are usually happy with their • lifestyles. Spending more money on them would not fall within their comfort zone.

The Big-Cushion/Save-Save Strategy

Disadvantages to this strategyPreoccupation with money. Many • use valuable leisure time to earn more money than they can ever spend.Money has a destructive hold on • some people. A few miss out on the special rewards of retirement because their lives are centred on making more money instead of enjoying it.Excessive worry. The bigger the • cushion, the more some people worry.They worry about losing it or what • to do with it. A few worry over leaving it to those who either don’t deserve it or won’t appreciate it. Money can be a burden to some.

Fig. 5.4 Advantages and disadvantages of big-cushion/save-save strategy

5.6 The Capital-Protection/Spend-Interest StrategyMembers of this group seek a balance between saving and spending during retirement years. This strategy is a variation on the previous one, but the differences are significant. Those who adopt the capital-protection package enjoyed success in Phase I. They establish a cut-off date on earning and saving, however and promise themselves to begin spending their income without disturbing their capital.

No matter how large or small their capital may be, it is sacred. It is their security blanket. Those who adopt this strategy can often be found on cruise ships or the golf course. The moment they return from one trip, they calculate next year’s trip accordingly. These people are often happy with their solution, feeling they have the best of both worlds. It seldom occurs to them that they could begin to dip into their capital and take an extra trip or buy a luxury item they have always wanted.

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Advantages to this strategyRight combination for some. • Those who don’t mind having their capital grow smaller because of inflation and want more money to spend now have a good solution.Easy decision. It is not a • complicated strategy that requires constant review. It is simple to implement.Cushion can be any size. This • strategy makes sense for a millionaire or a person with only a few thousand rupees.

The Capital-Protection/Spend-Interest Strategy

Disadvantages to this strategyInflexible. Investment • portfolios need to be updated. Those who adopt this plan often see their investments deteriorate.Capital might disappear. If a • retiree neglects the portfolio long enough and if inflation is great enough, the cushion could become insignificant.Insecure without it. Some are so • hooked on this strategy that they never spend any of their capital.

Fig. 5.5 Advantages and disadvantages of capital-protection/spend-interest strategy

5.7 The Actuarial StrategyThis strategy is designed to take people as far as people can go; but not much further. The actuarial strategy involves spending capital at a regular clip so that little or nothing is left over for children, friends or charitable institutions. For example, as a widow of 65, people can, according to the actuarial tables, anticipate 19.5 more years. (This figure will probably increase in the future.) Their income from social security or company pension will remain relatively constant no matter how long People live.

It is possible for people to plan on spending their capital (and the income it produces) over a specified time period, so much per month or year. People must take into account the fact that, as people dip into their capital, the income it produces will diminish. This strategy can be a high risk. If people have a partner, the calculations are more complex and people may want to talk to a financial expert before embarking on the actuarial strategy.

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Advantages to this strategyRetirement years more • enjoyable. If spending money will make people happier, then the advantage is one can spend it while enjoying it is most.Might eliminate estate taxes. The • government can’t take some-thing from people if it is spent in advance.Excellent plan if it works. Wind-• ing up close to breaking even is a dream of many. If this is their dream and it works, people can take satisfaction from beating the system.

The Actuarial Strategy

Disadvantages to this strategyPlan might leave people stuck. • People could wind up broke and insecure.One might want their security • blanket back. Once you spend most of your capital, sorrow might set in and ruin later years.Actuarial tables are for large • groups. As an individual, you may outlive the tables by many years. If this happens, you will loose your security blanket.

Fig. 5.6 Advantages and disadvantages of the actuarial strategy

5.8 The Big-Scare Contingency StrategyThis strategy is a supplemental strategy frequently called into play when something unexpected happens. For example, if a retiree who is an advocate of the big-cushion/save-save strategy encounters a serious medical problem, he might decide to spend part of his cushion while he will still enjoy it. “Why not live it up in case I won’t be around?”

People may know members of this group, who take hurried trips around the world. The big-scare plan is, in • essence, a speed-up strategy. People do some things people had always planned to do, but people do them sooner and faster. As with all strategies, some risk is involved. People might, for example, go on an all-out, once-in-a-lifetime • spending spree and then discover that their medical condition was a false alarm. Should this happen, a reverse contingency plan might be required.

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Advantages to this strategyFew of us seem to have a • delightful last fling by spend-ing our savings quickly.Satisfaction in living an • accelerated lifestyle. Even under such circumstances, a big indulge can be fun.Going first class for a short • time is better than never going first class at all. Sitting • on their capital under these circumstances is not a good alternative.

The Big- Scare Contingency Strategy

Disadvantages to this strategy

The uncertainty of it all. How • much better it is spend up without a health problem.Money not spend as well. • People are more likely to make poor choices under such pressures.This strategy holds too much • pressure. The danger of try-ing to crowd too much into a short period can be counter-productive.

Fig. 5.7 Advantages and disadvantages of the big-scare contingency strategy

5.9 The Share-the-Wealth StrategyThis happy plan can easily be incorporated with others. It is popular for all retirees, but especially appealing to those more advanced in years. This strategy advocates giving away money or belongings while they are still around to enjoy the process.

Used in a sensible way, this strategy can provide gratification to the giver and a special reward to those who receive the gifts. There are also tax advantages when people give their money away. Some people wait until a scare of some sort before embarking on this strategy.

Some risks are involved. For example, some individuals might enjoy the process so much they get carried away. Also, it can be a mistake to give children too much too soon. Finally, it is not a good plan for those who might get upset watching how some of their gifts are used.

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Advantages to this strategyProtects estate. Under the • Gift Tax laws, it is possible to give some amount each year to each beneficiary without being taxed. There are other savings.Gain more attention. Those • who receive money often show appreciation while people are still around.Life plan more • complete. The distribution of money ahead of time provides most with a feeling of fulfil-ment.

The Share-the-Wealth Strategy

Disadvantages to this strategySome may find this strategy pre-• mature. Some retirees get carries away with their generosity and discover they have needlessly lost some free-dom and control,May not be fully • appreciated. If People give money and it is not fully appreciated, remorse can set in.May do children more harm than • good. Giving money too soon can cause children to not reach their potential because they have too much protection.

Fig. 5.8 Advantages and disadvantages of share the wealth strategy

5.10 Tapping the Home EquityThe concerns of homeowners in or nearing retirement put a human face on a complex economic issue. The choices that they make, and the problems they face, also highlight the difficulty of shifting from a financial planning strategy that aims to preserve housing wealth to one that uses this asset as a retirement resource. Most older adults have limited amounts of home equity, and face difficult decisions and trade-offs:

Should they tap housing wealth early in retirement to sustain income security? • Should they wait and use this asset as a financial buffer to cope with an increasingly uncertain future? • How will the need to manage growing amounts of consumer debt influence these decisions?•

Trade downMany people approaching retirement have experienced enormous appreciation in their home’s value. Selling • such a home and buying a cheaper one can leave a substantial sum of money to meet current living expenses.

Sell and rentThe real estate market has changed to the extent that home ownership is not necessarily the best financial option. • People may come out ahead by selling their home and renting a house, apartment or condo. This option frees all of their home equity for living expenses.To calculate a financial analysis of owning versus renting, add up all the costs associated with home ownership. • This includes the direct costs of taxes, insurance and maintenance, plus the opportunity cost of earnings on the capital tied up in the home. Then, compare this figure to what it would cost people to rent adequate housing.

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Reverse mortgageA reverse mortgage is a home equity loan. It can be granted only on homes that are mortgage free. Rather than • making payments to the mortgage company, the mortgage company makes payments to people. As a result, people receive monthly income based on the value of their home as long as people live or in some cases, • for a specified number of years. The money people receive is tax free since it is a loan rather than income. At the end of the term or when people move or die, the loan must be repaid, including accumulated interest, • usually by selling their home.At this time, reverse mortgages are not available in all states. •

Sale-leasebackTypically, in a sale-leaseback, selling the home to someone at an agreed upon price but continue to live in it by • paying monthly rent. The new owner becomes responsible for paying taxes, insurance and maintenance. This arrangement gives you the value of their home to use for current living expenses without requiring one to • move. Sale-leasebacks can be arranged with investors, family members, community organisations, churches and charities.

5.11 Tools to Help Plan Their SpendingRunning out of money is perhaps the biggest fear retirees have. This is understandable. People are retiring younger, living longer and dealing with continually rising living expenses. Uncertainty over future inflation and investment returns only adds to the problem. Here are two tools to help people implement whichever strategy people choose to follow.

Tools to Plan Spending

The Constant Withdrawal Plan

The Increasing Withdrawal Plan

Fig. 5.9 Tools to Plan Spending

The constant withdrawal planIf their preferred strategy includes spending capital, a plan for judicious spending will allow people to supplement other income to provide an enjoyable retirement. People must work with a couple of unknowns, how long people will need income and what future rate of return people can expect; but sufficient data help people make educated guesses on these.

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The increasing withdrawal planIf one wants to be sure about something is left when one dies, here’s a plan that will work for all. Harvard • University’s endowment fund developed a spending guideline in 1973 to ensure a person wouldn’t prematurely run out of money. The rule assumes a balanced portfolio allocated half to stocks and half to bonds and cash equivalents. It limits • the first-year withdrawal to four percent of the portfolio’s total value. Then, in each following year, increase this amount by the previous year’s rate of inflation.Today’s computer technology makes it easy to combine this approach with one designed to reduce capital. With • assumptions on inflation, rate of return and longevity, a withdrawal schedule can be set up. Such a schedule will increase each year by their assumed rate of inflation and carry people through the specified • number of years. With such a spending plan, it is imperative that people monitor their assumptions and make adjustments as required. One simple way to do this is to calculate a capital balance for each year into the future. Then, compare their • actual balance to this figure.

5.12 Income TaxMany people invest in insurance with a view to saving taxes. So what are the tax rebates available to an individual in respect of premium paid on life insurance policies? Read on to find out. . .

What are the tax rebates available to an individual in respect of premium paid on life insurance policies?Life insurance premium paid by an individual qualifies for rebate under Section 88 of Income Tax Act. An individual can claim rebate on premium paid for a maximum of Rs 70,000 in each financial year.

How is tax rebate under Section 88 calculated?Calculation of tax rebate under Section 88 depends on the individual’s gross total income and contribution made towards life insurance premium.

Thus if the gross total income is,Less than Rs 150,000, rebate is calculated at 20% of the premium paid towards life insurance.• Greater than Rs 150,000 but less than Rs 500,000, rebate is computed at 15% of the premium paid.• Greater than Rs 500,000, the individual is not eligible to claim any tax benefits on the life insurance premium • paid.

Are maturity proceeds on life insurance and pension policies taxable?The maturity proceeds of life insurance policies are not taxable. However under pension plans, any amount received on surrender of the plan shall be deemed to be the assessee’s income and taxed accordingly.

Can a tax rebate be claimed if the premium is paid by an individual on his/her spouse’s policy?An individual can make payment on his/her spouse’s policy and the premium paid will qualify for rebate under Section 88.

What are the tax benefits available under pension plans?Under Section 80CCC, where an assesse has paid/deposited any amount towards any annuity plan for receiving pension fund, he/she will be allowed deduction up to Rs 10,000 from the total income. Where the amount paid/deposited has been taken into consideration for the purpose of claiming deduction, a rebate with reference to such amount shall not be allowed under Section 88.

If a person discontinues paying premium on his life insurance or a pension policy, does he get tax rebate?If a person stops paying premium amounts on his/her life insurance policy, it amounts to discontinuation of the policy; hence he is not entitled to claim any tax benefits.

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If a tax payer discontinues the life insurance policy before premiums have been paid for a period of 2 years from the commencement of the policy, no tax deduction is allowed in respect of any premium paid on that policy in the year in which the policy is terminated.

Further the amount of tax deduction allowed for the premium paid in the preceding year is also treated as the tax payable for the year in which the policy is terminated.

If a person participating in a Unit Linked Insurance Plan (ULIP) terminates his policy, can he claim any rebate on the same?If a person participates in a Unit Linked Insurance Plan (ULIP) and then terminates his participation, he will not be entitled to claim any rebate.

Is the amount received on maturity of UTI ULIP scheme taxable?No, the maturity proceeds of UTI ULIP scheme are exempt from tax under Section 10(33), subject to the same being received on or after April 1, 2002.

What are the deductions available in respect of medical insurance premium?The premium paid under medical insurance premium qualifies for rebate under Section 80D as follows:

Insurance premium paid or Rs 10,000 whichever is lower.• The aforesaid limit is Rs 15,000, where the individual or his spouse or dependant parents or any member of the • family (from whom such premium is being paid) is a senior citizen (i.e. one who is resident in India [Images] and who is at least 65 years of age at any time during the previous year).

5.13 The Long-Term Financial StrategyEveryone’s cash flow needs in retirement will be different; some retirees will require more in the early years to travel and live it up, while others may take a more conservative approach and save for health care or unforeseen expenses in their later years.

Most people approach retirement spending this way: add up the bills, throw in a little extra for discretionary spending, and if their pension and/or Social Security don’t cover these costs, they’ll pull the difference from their portfolio. This “as needed” approach is a backwards and haphazard way to approach the issue because it doesn’t take the effects of rising costs or sustainability into account.

Each individual’s or couple’s retirement income will likely fluctuate from year to year as market conditions and other factors affect investment performance. This means that retirement spending is also affected, and should be carefully and deliberately managed to avoid financial road blocks. Mainstream advice still touts the 4% withdrawal rate, although in reality, very few retirees take the exact same amount year in and year out to live.

Actual spending patterns vary greatly across the board, largely based on the retiree’s personal wishes and outlook. The U.S. Department of Labour, Bureau of Labour Statistics released data a few years ago indicating that those over age 75 spent significantly less than their younger counterparts. This reflects the fact that there is generally a higher level of health and vitality among younger retirees. Also, new retirees often have a lot of free time; therefore, spending ensues.

Another explanation is that the lower spending may be a generational issue. Older retirees have been impacted by vivid memories of the teachings of frugality they received from their parents who were adults during the Great Depression. What these statistics reflect is a continuation of prior lower spending levels and not necessarily a sudden decrease from their younger years.

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In any case, a wise retiree will implement “spending rules” to keep the cash flow in check. If you want higher withdrawals in the early years, you must realise that you’ll have to cut back somewhere down the line. Your portfolio won’t be able to sustain that kind of spending forever, and it will take a great deal of understanding and discipline to be able to reduce your lifestyle later. It also matters when you retire; bigger withdrawals coupled with a bear market early in retirement could be a disastrous combination.

If you prefer a more consistent spending approach, you may institute withdrawal caps and freezes for tough times. And what about the effects of inflation? If one sets up withdrawals to be increased for inflation only every few years rather than in each year, the sustainability of those withdrawals will be enhanced. This is true of any spending pattern that does not increase withdrawals for inflation in a steady manner, which is something to heavily consider.

In conclusion, a formal written spending policy can help you determine a realistic retirement lifestyle and manage withdrawals effectively. The hard part is sticking to the rules when all is said and done. Formulating a policy should help manage expectations and behaviour for whatever the future holds, and this practice will go a long way in sticking to a sound distribution strategy throughout retirement. Planning your spending may very well determine just how well you spend your golden years.

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SummaryThe squeeze-and-spend strategy says that people should make renewed efforts to squeeze out more disposable • income from their present income and what they save should be spent on things that put more style in their life. Frequently these retirees calculate how much money they think they will need for a comfortable cushion. They • then invest or bank that sum and relax. Big-cushion people frequently admit they are hooked on money, they say the size of their security blanket is • responsible for most of their happiness.Those who adopt the capital-protection package enjoyed success in Phase I. They establish a cut-off date on • earning and saving, however and promise themselves to begin spending their income without disturbing their capital.Money has a destructive hold on some people. A few miss out on the special rewards of retirement because their • lives are centred on making more money instead of enjoying it.The real estate market has changed to the extent that home ownership is not necessarily the best financial • option.A systematic withdrawal plan may reduce tax liability in the long run by keeping people out of the top tax • brackets in later years.

References Knuckey, D., 2002. • Conscious Spending for Couples: Seven Skills for Financial Harmony, John Wiley and Sons.Karp, G., 2008. • Living Rich by Spending Smart: How to Get More of What You Really Want, Addison-Wesley Professional.Rediff business, 2005. • Insurance & income tax rebates. [Online] Available at: < http://www.rediff.com/money/2005/feb/01perfin.htm>. [Accessed 25 July 2011].In time finance planning services pvt. Ltd., • The squeeze and spend strategy. [Online] Available at: < http://intimefinance.com/2009/07/the-squeeze-and-spend-strategy/>. [Accessed 25 July 2011]. Hamilton, M. and Carrick, R., 2010. • Maximizing your retirement savings efforts. [Video online] Available at: <http://www.youtube.com/watch?v=33f4VFzWqBs> [Accessed 25 July 2011].Geobeats, 2011. • Strategies to Boost Retirement Savings. [Video online] Available at: < http://www.youtube.com/watch?v=UNo3uWwhAlA> [Accessed 25 July 2011].

Recommended Reading Hoffman, E., 2002. • The Retirement Catch-Up Guide: 54 Real-Life Lessons to Boost Your Retirement Resources Now, Newmarket Press.Armstrong, F. and Brown, P., 2009. • Save Your Retirement: What to Do If You Haven’t Saved Enough Or If Your Investments Were Devastated by the Market Meltdown, FT Press.Carlson, R.C., 2004. • The new rules of retirement: strategies for a secure future, John Wiley and Sons.

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Self AssessmentWhich statement is true?1.

Wise spending to enrich retirement, not saving, is perhaps the real financial challenge. a. Wise saving to enrich retirement, not spending, is perhaps the real financial challenge. b. To achieve the right balance requires some clever planning plus a lot of investment.c. To achieve the right balance requires wise spending.d.

________________says that people should make renewed efforts to squeeze out more disposable income from 2. their present income and what they save should be spent on things that put more style in their life.

The squeeze-and-save strategya. The squeeze-and-spend strategyb. The modest-cushion-and-relax strategyc. The big-cushion/save-save strategyd.

_________________ is specifically designed for those who enjoy saving more than spending. 3. The modest-cushion-and-relax strategya. The big-cushion/save-save strategyb. The squeeze-and-save strategyc. The capital-protection/spend-interest strategyd.

_______________ provides both security and discretionary income.4. The big-cushion/save-save strategya. The capital-protection/spend-interest strategyb. The modest-cushion-and-relax strategyc. The squeeze-and-save strategyd.

A ___________ is designed for unexpected expenses, but many find it painful to use when the time comes.5. Cushiona. Pensionb. Savingc. Investment d.

Members of __________________ group seek a balance between saving and spending during retirement 6. years.

the modest-cushion-and-relax strategya. the squeeze-and-save strategyb. the capital-protection/spend-interest strategyc. retired d.

_____________ involves spending capital at a regular clip so that little or nothing is left over for children, 7. friends or charitable institutions.

The big-scare contingency strategya. The share-the-wealth strategyb. The squeeze-and-save strategyc. The actuarial strategyd.

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Under the______________, it is possible to give some amount each year to each beneficiary without being 8. taxed.

gift tax lawsa. share-the-wealth strategyb. home equityc. reverse mortgaged.

____________________ plan for judicious spending allows people to supplement other income to provide an 9. enjoyable retirement.

Reverse mortgagea. The increasing withdrawal planb. The constant withdrawal planc. Home equityd.

In _________________ the new owner becomes responsible for paying taxes, insurance and maintenance. 10. Reverse mortgagea. increasing withdrawal planb. constant withdrawal planc. sale-leasebackd.

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Chapter VI

Insurance

Aim


define the term insurance•

explain insurance goals•

discuss the ways to manage risk•

Objectives


explain how to become self insured •

define transferring the risk to an insurance company•

elaborate the types of risk•

Learning outcome


enlist the need for insurance•

understand how to meet insurance needs•

converse• tips about shopping for insurance

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6.1 IntroductionInsurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company. A pool is created through contributions made by people seeking to protect themselves from common risk. Premium is collected by insurance companies, which also act as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool. Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type.

6.2 Definition of InsuranceInsurance is a contract between two parties, whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.

The party bearing the risk is known as the ‘insurer’ or ‘assurer’ and the party whose risk is covered is known • as the ‘insured’ or ‘assured’.A promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is • designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance • policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible) and the insurer pays the rest.

Concept of insurance / How insurance works?On the one hand, human life is subject to various risks—risk of death or disability due to natural or accidental causes. Human beings are also prone to diseases, the treatment of which may involve huge expenditure. On the other hand, property owned by man is exposed to various hazards, natural and man-made.

When human life is lost or a person is disabled permanently or temporarily, there is a loss of income to the household. The family is put to hardship. Sometimes survival itself is at stake for the dependants.

When it comes to property, the loss or damage caused to property results in either whole or partial loss in income to the person or entity.

Risk has the element of unpredictability. Death/disability or loss/damage could occur at anytime. Losses • can be mitigated through insurance. Insurance is a commodity, which offers protection against various contingencies. Many insurance products are available for life and non-life. In non-life, apart from personal covers such as • accident covers and health insurance, there are products covering liabilities under a particular law and or common law. The various products are designed to cater different needs of an individual or industry such as fire insurance policy on multi-storeyed building, householder’s policy.An insurance contract promises to make good to the insured a certain sum in consideration for a payment in the • form of premium from the insured.Human life cannot be valued. Hence, the sum assured (or the amount guaranteed to be paid in the event of a • loss) is by way of a ‘benefit’ in the case of life insurance. Life insurance products provide a definite amount of money to the dependants of the insured in case the insured dies during his active income earning period or becomes disabled on account of an accident causing reduction/complete loss in his income earnings. An individual can also protect his old age when he ceases to earn and has no other means of income by purchasing an annuity product.

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A personal accident cover is also for protection. In the event of death or disability, permanent or temporary of • the insured, it provides for compensation, which is either the whole or a percentage of the capital sum insured depending on the kind of loss.In the case of Health Insurance, the policy seeks to cover expenses towards of treatment of diseases and/or • injury up to the sum insured opted for by the insured.In respect of insurance relating to property, there are many products available. Property may be covered against • fire and perils of nature including flood, earthquake, etc. Machinery may be insured for breakdown. Goods in transit can be insured under a marine cargo insurance cover. Insurance covers are also available for ships and other vessels. A motor insurance policy covers third party damage as well as damage to the vehicle.Insurance of property is based on the principle of indemnity. The idea is to bring the insured to the same financial • position as he /she was before the loss occurred. It safeguards the investment in the property. Where there is no insurance, losses can mar a project or an industry. General insurance offers stability to the economy and to the society.Insurance offers security and so offers peace of mind to the individual. The concept of insurance is that the • losses of a few are made up by contribution from many. It is based on the law of large numbers. It stemmed from the need of man to find a solution for mitigation of losses. It also reflects the nature of man to find a solution collectively.It is important for all to understand the various products that life and general insurance companies offer before • choosing the product they want to buy.As per regulations, insurers have to give the features of the products at the point of sale. The insured should • also go through the various terms and conditions of the products and understand what they have bought and met their insurance needs. They ought to understand the claim procedures so that they know what to do in the event of a loss.

Function of insuranceInsurance companies sell insurance policies that protect people from losses associated with specific unplanned • events. If the unplanned events covered by the insurance policy occur, the insurance company will pay the person insured with the insurance policy, a certain amount of money as set out in the rules of the plan. For instance, you could purchase an insurance policy for damages to your home and the insurance company • pays for damages if the home was affected by a fire or other events covered by the plan.

6.3 Insurance GoalsTheir objective is to develop an insurance package that accomplishes the following goals:

Greater Peace of

Mind

Money Saved

Less Confusion and

Frustration

Insurance Goals

More help from

Insurance Agents

Fig. 6.1 Insurance goals

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GOAL 1Greater peace of mind: The secret is to be able to look down the road recognising real risks, but not creating ones that are not there. When a risk is identified, one should pass it along to an insurance company and then relax. No part of life, especially retirement, is without any worry, but it is better to transfer as many worries you can to insurance companies.

GOAL 2Less confusion and frustration: For most of the people, insurance contracts are hard to understand. There are too many clauses, too much exclusion and a lot of small print. Many capable people throw up their hands in defeat.

GOAL 3Money saved: Senior discounts provide opportunities to stretch insurance money if people select the right policies and avoid duplication. Saving money in areas where people need less insurance means, they get more protection where their need is greater.

GOAL 4More help from insurance agents: Among professional people, their insurance agent should stand beside their medical doctor and lawyer. The more they learn about insurance, the more effective they will be in building a sound, rewarding relationship with their agent. The better their relationship, the more help they would receive.

6.4 Managing RisksThere are four ways of dealing with or managing each risk that you have identified:

Managing Risk

Accept it

Transfer it

Reduce it

Eliminate it

Fig. 6.2 Managing risk

For example, you may decide to accept a risk because the cost of eliminating it completely is too high. You might • decide to transfer the risk, which is typically done with insurance. Or you may be able to reduce the risk by introducing new safety measures or eliminate it completely by changing the way you produce your product.When you have evaluated and agreed on the actions and procedures to reduce the risk, these measures need to • be put in place.Risk management is not a one-off exercise. Continuous monitoring and reviewing are crucial for the success of • your risk management approach. Such monitoring ensures that risks have been correctly identified and assessed and appropriate controls put in place. It is also a way to learn from experience and make improvements to your risk management approach.

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Not all risk needs to be accepted. Through effective management, risk can be controlled and minimised. Effective • risk management seeks:

to contain the financial impact of losses upon the University within limits which are determined in advance �to be acceptable;to minimise the disruption associated with any claim through efficient and effective administrative �response

Risk management is the process of identifying and analysing possible exposure to loss and reducing loss potential • thereby protecting the University’s physical and financial assets.Risk management provides structured systems for identifying and analysing potential risks, and devising and • implementing responses appropriate to their impact. The responses generally draw on strategies of risk prevention, risk transfer, impact mitigation or risk acceptance.

The benefits of managing riskThe benefits of managing risk at the program level are: •

more effective strategic planning as a result of increased knowledge and understanding of key risk �exposures fewer costly surprises, by preventing what is undesirable from occurring �better outcomes in terms of program sustainability, effectiveness and efficiency and �greater openness and transparency in decision-making and ongoing management processes �

The benefits of managing risk at the activity level include: • activities are more efficiently and effectively managed because advisers and stakeholders understand the �activity’s vulnerability to risk and take adequate preventative or mitigation measures fewer costly surprises in activity implementation �more likelihood of activities attaining their objectives because constraints are minimised and opportunities �maximised more likelihood of outcomes being sustainable and �greater openness and transparency in activity decision making and management processes �

Effective risk management contributes to improved governance, which can be a development objective in its • own right.

6.5 Become Self InsuredThe more money people have, the easier this is to do. For example, one might buy dental insurance, but perhaps their dentist does not choose to participate in such a plan. The policy is good only if one switch dentists. Solution - Insure one. Instead of paying into a policy each month, use the money to build a kitty for future dental bills. Such a fund becomes a self insurance policy. Self insurance works best when the risk is small. Deductibles are, in a sense, self insurance. The more money people have, the higher the deductible can be.

Most people buy life insurance to cover family expenses in case any of the family’s breadwinners or other • members that provide “economic value” dies. This amount is designed to cover both living expenses as well as major one-time costs such as college education for kids and (sometimes) complete retirement funds for the surviving spouse.The amount of life insurance usually purchased is generally dictated by this formula: total funds needed for • family’s provision = family assets + amount of life insurance proceeds.As you might imagine, when a family is young, family assets are quite low. In fact, they’re often zero. In these • cases, total funds needed for a family’s provision is equal to the amount of life insurance needed. In other words, you have to buy insurance to completely cover your family’s financial needs. You cannot cover any of the family’s post-death needs from your current assets.But as time goes on, your family assets (net worth) start to build. As the family’s assets become larger, the • amount you need from your insurance will decrease.

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Eventually, you’ll get to the point where the total funds needed for the family’s provision is equal to the family’s • assets. At this point, you’re self-insured. You no longer need life insurance. As time goes on and your assets grow, your family assets will become much larger than the total funds needed for the family’s provision. At this point you are not only self-insured, but you also have a nice cushion for safety. For most people, the point where the family’s assets equal and then surpass the family’s need takes a long time to occur

6.6 Transfer Risk to an Insurance CompanyThe purpose of this action is to take a specific risk, which is detailed in the insurance contract, and pass it from • one party who does not wish to have this risk (the insured) to a party who is willing to take on the risk for a fee, or premium (the insurer).Risk transfer shifts the financial burden of paying for specified types of losses when they occur under specified • circumstances without necessarily transferring the responsibility for conducting the operations that may generate these losses. The organisation to which this risk financing obligation is shifted is known as the “transferee,” and the • organization that suffers the losses is the “transfer or.” For example, when you buy insurance on your car, you are the transferor, and the insurer is the transferee.

6.7 Types of RiskAn individual faces a number of risks in the process of daily living. One can generally cover many of them from current assets through self insurance, but here are some that one should consider insuring against.

Property damage: This is the insurance people have on their car, home, and other personal property to repair or • replace it if damaged by fire, storm, theft, or the negligence of someone else. When buying this type insurance, consider carefully the relationship between premium cost and deductibles. By assuming some of the risk through a higher deductible, you can reduce your premium.Disability: If there is a 42-year-old man, he is four times more likely to become disabled for three months or • longer before retirement than one who is to die. This can be devastating for their retirement plans. However, after retirement, one probably won’t need to continue this coverage. He / she must check it with his / her employer to see what coverage is available under a group plan. One may find he has sufficient coverage or he may need to buy additional insurance until he retires.Death: Life insurance is an important part of an overall financial plan, but one must see it for what it is. You • should not get led into buying life insurance as an investment. Sales commissions and administrative costs run high. In retirement, minimize coverage since they will have other assets to cover living costs for survivors. Look into converting existing whole life policies to paid-up insurance. If they have a policy that pays dividends, consider having the dividend applied to the premium. One insurance feature that is attractive to retired couples is the “second-to-die” policy. This policy provides cash to help with property taxes and thus eliminates the need to sell other assets when the property passes to children.Medical expenses: Everyone is aware of the high cost of medical care. A major illness or injury could easily wipe • out years of savings. Their employer or professional society may offer a group plan. If so, it is probably their best option. If one has to buy medical insurance on his own, he must look for a high-deductible, catastrophic policy. Premiums are so expensive on private policies that one probably can only afford to insure against major risk.Long-term care: Only five percent of people between ages 75 and 84 are in nursing homes. However, the • percentage increases to 19 percent in the 85 and over age group. Seventy to 80 percent of nursing home residents’ use up their capital in a year or so. Long-term care insurance is available to help with these expenses. Premiums for this coverage increase with age. So, if they are considering it, buy it before the age of 60. As with any insurance, tailor a policy to balance benefits and premiums. One should also include home care as well as nursing home care so they would not be forced to leave their home until they physically have to.

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Life-care community: An alternative to long-term care insurance is a financially sound life-care community. • These communities, located throughout the country, provide care for residents as needed. Typically, there are three levels of care; independent living, assisted living, and custodial care. There is an entrance fee of several thousands and a monthly charge consistent with the level of care provided. While these communities are not inexpensive, residents are assured of the care they need throughout their lifetimes.

6.8 Meeting the Insurance NeedsWhen your income or personal situation changes, review your insurance coverage. If your income decreases • because of a layoff, illness, disability, divorce, or death of a breadwinner, you may find it extremely difficult to pay insurance premiums. If this happens, you should first determine your minimum needs for insurance. Then, call or write your agent to check into a different payment plan that allows you to keep your coverage. Or, investigate plans with lower premiums.Insurance is the primary way you protect yourself against financial loss caused by illness, accidents, and other • destructive or damaging events. Through insurance, you pool your risk with others. You pay (or your employer pays for you) a premium to an insurance company that in return pays for the damaging effects of a large loss if it occurs.You may decide to accept some risks and share others. Savings, instead of insurance or maintenance contracts, • could be used to pay a variety of unexpected expenses such as burial expenses and repair of major equipment. Using deductibles (the amount of money you agree to pay per claim before the insurance company pays for a loss) is a way to share risk. If you are married, another way to share risk is to make sure both spouses are employable so your family is not dependent on only one income.Consider minimizing your risks. Although you cannot eliminate risk from your life, you can postpone, minimize, • or control some losses. For example, wear your seat belt and use more caution or do not drive during bad weather to reduce your chances of an accident.

Additional ways to cut your insurance costsInsurance is the primary way you protect yourself against financial loss caused by illness, accidents and other destructive or damaging events. Through insurance, you pool your risk with others. You pay (or your employer pays for you) a premium to an insurance company that in return pays for the damaging effects of a large loss if it occurs.

You may decide to accept some risks and share others. Savings, instead of insurance or maintenance contracts, could be used to pay a variety of unexpected expenses such as burial expenses and repair of major equipment. Using deductibles (the amount of money you agree to pay per claim before the insurance company pays for a loss) is a way to share risk. If you are married, another way to share risk is to make sure both spouses are employable so your family isn’t dependent on only one income.

Consider minimising your risks. Although you cannot eliminate risk from your life, you can postpone, minimise or control some losses. For example, wear your seat belt and use more caution or don’t drive during bad weather to reduce your chances of an accident. Or, practice a healthy lifestyle to decrease your chances of illness.

For all insurance:Look for broad policies that insure exactly what you need to insure. Avoid narrowly defined policies. For example, • one comprehensive health insurance policy should eliminate the need for a cancer insurance policy.Do not buy insurance coverage for risks that you could insure yourself. You could prepare for low-cost risks, • such as minor damage to your car, through savings.Take the biggest deductible that you can afford. The deductible is the part of the insurance costs that you have • to pay.Check policies to make certain that you are not paying twice for the same coverage. For example, you could • lower your auto insurance premium by decreasing your medical payments coverage if you have good health care coverage for you and your family.

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Check out all possible discounts with your insurance representative.• Pay premiums the least expensive way which is usually annually, not quarterly or monthly.• Compare the costs of several different companies before making a choice. Call state Department of Insurance • to obtain a list of typical prices with different licensed companies.Learn if you are eligible for a group policy. Group rates are lower than individual rates.• Check the local library for information about the financial soundness of insurance companies, such as Best’s • Insurance Reports. You should select a company that has at least an “A” rating.

6.9 Tips on Shopping for InsuranceInsurance is a product you purchase to protect yourself from financial disasters and your needs for protection • can change over time. It´s important to understand the insurance policies you have and decide if that coverage is still right for you. If you´re considering buying insurance, here are some shopping tips to remember.Never be pressured into a decision. Never buy at the first meeting and seek the advice of someone you trust.• Compare carefully before you switch policies. Before switching policies, compare benefits, premiums, limitations • and exclusions carefully.You also can view a company profile that includes information about the company’s financial status and • complaint history.Never buy anything you do not understand. Ask questions and take notes when talking to an agent. These could • help you later if there is a dispute over what you were told about a policy.Answer all questions on the application accurately. Omitting or falsifying information could cause the company • to deny your claims or cancel your policy.Read what you are asked to sign. Never sign a blank application form.• Do not pay cash or make a check out to an individual agent. Make checks payable only to the insurance company • or insurance agency. Insist upon a receipt signed by the agent on the company letterhead.Know your rights. Most health policies have a “free-look period” which allows you to return your policy within • 10 to 30 days after receiving it to get your money back.

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Summary The first goal of insurance is to protect their financial resources. The second is to provide peace of mind.• People should plan to cover small risks from current assets and insure against large risks.• Larger deductibles will lower their premium costs.• Health care costs represent potentially high risks for retired people.• Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange • for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.A personal accident cover is also for protection. In the event of death or disability, permanent or temporary, of • the insured, it provides for compensation which is either the whole or a percentage of the capital sum insured depending on the kind of loss.Risk transfer shifts the financial burden of paying for specified types of losses when they occur under specified • circumstances without necessarily transferring the responsibility for conducting the operations that may generate these losses. Although you cannot eliminate risk from your life, you can postpone, minimise or control some losses.• Compare carefully before you switch policies. Before switching policies, compare benefits, premiums, limitations • and exclusions carefully.

References Baldwin, B.G., 2001. • The new life insurance investment advisor, 2nd ed., McGraw-Hill Professional.Hardy, E.R., Huebner, S.S., Michelbacher, G.F. and Mudgett, B.D., 2008. • Insurance Modern business, Alexander Hamilton Institute.Investor words.com. • Insurance. [Online] Available at: < http://www.investorwords.com/2510/insurance.html#ixzz1SdVYPbSE> [Accessed 25 July 2011].Ehowmoney. • Concept of insurance. [Online] Available at: <http://www.ehow.com/facts_7199060_concept-insurance.html#ixzz1SdXbzK7H>. [Accessed 25 July 2011].Investor words.com. • Health Insurance Tips for Self-Employed People. [Video online] Available at: <http://www.investorwords.com/videos/?155699244> [Accessed 25 July 2011]. Noth, C., 2009. • Life Insurance Awareness Month [Video online] Available at: <http://www.youtube.com/watch?v=Cz4DF9L2fpg&playnext=1&list=PLD1FFCA99D77B1E1B> [Accessed 25 July 2011].

Recommended Reading Zevnik, R.W., 2004. • The Complete Book of Insurance: Understand the Coverage You Really Need, Sphinx Pub.Rejda, 2005. • Principles of Risk Management and Insurance, Pearson Education India.Green, M.A. and Rowell, A.C., 2007. • Understanding Health Insurance: A Guide to Billing and Reimbursement, 9th ed., Cengage Learning.

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Self Assessment _______________ provides financial protection against a loss arising out of happening of an uncertain event.1.

Insurancea. Pensionb. Gratuityc. Salaryd.

The party bearing risk is known as the ___________.2. insureda. insurerb. assuredc. employerd.

The party whose risk is covered is known as the ___________.3. insurera. assurerb. insuredc. employerd.

_____________________ provides a definite amount of money to the dependants of the insured in case the 4. insured dies during his active income earning period.

Personal accident covera. Health insuranceb. Theft insurancec. Life insurance productsd.

In case of_____________, the policy seeks to cover expenses towards of treatment of diseases and / or injury 5. up to the sum insured opted for by the insured.

health insurancea. property insuranceb. personal accident insurancec. third party insuranced.

_______________ is the process of identifying and analyzing possible exposure to loss and reducing loss 6. potential thereby protecting the University’s physical and financial assets.

Insurancea. Investmentb. Risk managementc. Fund managementd.

________________ works best when the risk is small.7. Self insurancea. Insuranceb. Risk managementc. Mutual fundd.

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_______________ shifts the financial burden of paying for specified types of losses when they occur under 8. specified circumstances without necessarily transferring the responsibility for conducting the operations that may generate these losses.

Risk managementa. Risk transferb. Risk insurancec. Insurance transferd.

__________________ is the insurance people have on their car, home, and other personal property to repair or 9. replace it if damaged by fire, storm, theft, or the negligence of someone else.

Disabilitya. Deathb. Property damagec. Medical expensesd.

An alternative to long-term care insurance is a financially sound_________________.10. life-care communitya. communityb. life care groupc. life care strategyd.

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Chapter VII

Pension and Benefits of Retirement

Aim


explain different classes of pension•

describe the benefits of retirement •

elucidate welfare measures for pensioners•

Objectives


explain compulsory retirement pension •

describe commutation of pension •

elucidate contributory provident fund•

Learning outcome


understand classes of pension•

identify benefits of retirement enlist •

enlist welfare measures for pensioners •

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7.1 Classes of PensionFollowing are the various classes of pensions:SuperannuationA superannuation pension shall be granted to a Government servant who is retired on his attaining the age of 60 years.

Retiring pensionA retiring pension shall be granted to a Government servant who retires, or is retired before attaining the age of superannuation or to a Government servant who, on being declared surplus opts, for voluntary retirement.

Voluntary retirementAny Government servant can apply for voluntary retirement, three months in advance, only after the completion of twenty years of his qualifying service, provided there is no vigilance or departmental enquiry pending /initiated against him/her.

Invalid pensionInvalid Pension may be granted if a Government servant applies for retirement from the service on account of any bodily or mental infirmity which permanently incapacitates him/her for the service. The request for invalid pension has to be supported by medical report from the competent medical board.

Compensation pensionIf a Government servant is selected for discharge owing to the abolition of a permanent post, he shall, unless he is appointed to another post the conditions of which are deemed by the authority competent to discharge him/her to be at least equal to those of his own, have the option:

of taking compensation pension to which he may be entitled for the service he had rendered, or • of accepting another appointment on such pay as may be offered and continuing to count his previous service • for pension

Compulsory retirement pensionA Government servant compulsorily retired from service as a penalty may be granted, by the authority competent to impose such penalty, pension or gratuity, or both at a rate not less than two-thirds and not more than full compensation pension or gratuity, or both admissible to him on the date of his compulsory retirement. The pension granted or allowed shall not be less than Rs. 3500/- p.m.

Compassionate allowanceA Government servant who is dismissed or removed from service shall forfeit his pension and gratuity:Provided that the authority competent to dismiss or remove him from service may, if the case is deserving of special consideration, sanction a compassionate allowance not exceeding two-thirds of pension or gratuity or both which would have been admissible to him if he had retired on compensation pension.

(i) A compassionate allowance sanctioned under the proviso to sub-rule (ii) shall not be less than the amount of Rupees one thousand nine hundred and thirteen per mensem.

Extraordinary pensionExtraordinary pension in the form of disability pension/extraordinary family pension may be paid to the Government servant/his family if disablement/death (or the aggravation of disablement/death) of the Government servant, during his service, are attributed to the Government service. For the award of extraordinary pension, there should thus be a casual connection between disablement and Government service; and death and Government service, for attributability or aggravation to be conceded. The quantum of the pension, however, depends upon the category of the disablement/death.

Government servants appointed on or after 1.1.2004 are not covered by the CCS (Extraordinary Pension) Rules.

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Family pensionFamily pension is granted to the widow / widower and where there is no widow / widower to the children of a Government servant who entered in service in a pensionable establishment on or after 01/01/1964 but on or before 31.12.2003 or having entered service prior to that date came to be governed by the provisions of the Family Pension Scheme for Central Government Employees, 1964 if such a Government servant-

dies while in service on or after 01/01/1964 or • retired/died before 31.12.1963 or • retires on or after 01/01/1964 and• at the time of his death was in receipt of pension•

Family pension is payable to the children up to 25 years of their age, or marriage or till they start earning a monthly income exceeding Rs.3, 500/- + DA admissible from time to time p.m. whichever is earlier.

Widow daughter / divorced daughter/ unmarried daughter of deceased Government servant is also entitled for the family pension till her remarriage or up to life time or starts earning a monthly income exceeding Rs.3,500/- + DA admissible from time to time p.m. whichever is earlier.

Family pension is also payable to the dependent parents of deceased Government servants with effect from 01/01/98, where there is no claimant, i.e., spouse or child for family pension, alive.

If the son or daughter, of a Government servant is suffering from any disorder or disability of mind or is physically crippled or disabled so as to render him or her unable to earn a living even after attaining the age of 25 years, the family pension can continue to be paid for life time subject to conditions.

7.2 Retirement Benefits Following are the benefits of retirement:

Pension• Commutation of pension• Death-cum-retirement gratuity• General provident fund and incentives• Contributory provident fund• Leave encashment• Central Government Employees Group Insurance Scheme (CGEGIS)• TA for settlement at a station after retirement•

7.2.1 PensionThe minimum eligibility period for receipt of pension is 10 years. A Central Government servant retiring in accordance with the pension rules is entitled to receive superannuation pension on completion of at least 10 years of qualifying service.

In the case of family pension the widow is eligible to receive pension on death of her spouse after completion of one year of continuous service or before even completion of one year if the Government servant had been examined by the appropriate Medical Authority and declared fit for Government service.

With effect from 1.1.2006, pension is calculated with reference to average emoluments namely, the average of the basic pay drawn during the last 10 months of the service or last basic pay drawn whichever is beneficial. Full pension with 10/20 years of qualifying service is 50% of the average emoluments or last basic pay drawn whichever is beneficial. Before 1.1.2006, for qualifying service of less than 33 years, amount of pension was proportionate to the actual qualifying service broken into completed half-year periods. For example, if total qualifying service is 30 years and 4 months (i.e., 61 half-year periods), pension will be calculated as under:-

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Pension amount = R/2(X) 61/66

where R represents average reckonable emoluments for last 10 months of qualifying service or the last pay drawn as opted by the government servant.

Minimum pension presently is Rs. 3500 per month. Maximum limit on pension is 50% of the highest pay in the Government of India (presently Rs. 45,000) per month. Pension is payable up to and including the date of death.

7.2.2 Commutation of Pension A Central Government servant has an option to commute a portion of pension, not exceeding 40% of it, into a lump sum payment with effect from 1.1.1996. No medical examination is required if the option is exercised within one year of retirement. If the option is exercised after expiry of one year, he/she will have to under go medical examination by the specified competent authority.

Lump sum payable is calculated with reference to the Commutation Table constructed on an actuarial basis. The monthly pension will stand reduced by the portion commuted and the commuted portion will be restored on the expiry of 15 years from the date of receipt of the commuted value of pension. Dearness Relief, however, will continue to be calculated on the basis of the original pension (i.e. without reduction of commuted portion).

The formula for arriving for commuted value of Pension (CVP) isCVP = 40 % (X) Commutation factor* (X) 12

7.2.3 Death/Retirement GratuityRetirement gratuityThis is payable to the retiring Government servant. A minimum of 5 years qualifying service and eligibility to receive service gratuity/pension is essential to get this one time lump sum benefit. Retirement gratuity is calculated at 1/4th of a month’s Basic Pay plus Dearness Allowance drawn before retirement for each completed six monthly period of qualifying service. There is no minimum limit for the amount of gratuity. The retirement gratuity payable is 16½ times the Basic Pay, subject to a maximum of Rs. 10 lakhs.

Death gratuityThis is a one-time lump sum benefit payable to the widow/widower or the nominee of a permanent or a quasi-permanent or a temporary Government servant, including CPF beneficiaries, dying in harness. There is no stipulation in regard to any minimum length of service rendered by the deceased employee. Entitlement of death gratuity is regulated as under:

Qualifying Service Rate

Less than one year 2 times of basic pay

One year or more but less than 5 years 6 times of basic pay

5 years or more but less than 20 years 12 times of basic pay

20 years of moreHalf of emoluments for every completed 6 monthly peri-od of qualifying service subject to a maximum of 33 times of emoluments.

Maximum amount of Death Gratuity admissible is Rs. 10 lakhs with effect from 1.1.2006

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Service gratuityA retiring Government servant will be entitled to receive service gratuity (and not pension) if total qualifying service is less than 10 years. Admissible amount is half month’s basic pay last drawn for each completed 6 monthly period of qualifying service. There is no minimum or maximum monetary limit on the quantum. This one time lump sum payment is distinct from and is paid over and above the retirement gratuity.

Issue of no demand certificateDues owed by the retiring employees on account of Licence Fee for Government accommodation, advances, over payment of pay and allowances are required to be assessed by the Head of Office and intimated to the Accounts Officer two months in advance of the date of retirement so that these are recovered from retirement gratuity before payment. For this purpose the Licence Fee for those in occupation of Government accommodation is taken into account up to the end of the permissible period for which accommodation can be retained after retirement under the Rules on normal rent. The recovery of Licence Fee beyond that period is the responsibility of the Directorate of Estates. If, for any reason final dues cannot be assessed on time, then 10% of gratuity is withheld from gratuity

7.2.4 General Provident Fund and IncentivesAs per General Provident Fund (Central Services) Rules, 1960, all temporary Government servants after a continuous service of one year, all re-employed pensioners (Other than those eligible for admission to the Contributory Provident Fund) and all permanent Government servants are eligible to subscribe to the Fund. A subscriber, at the time of joining the fund is required to make a nomination, in the prescribed form, conferring on one or more persons the right to receive the amount that may stand to his credit in the fund in the event of his death, before that amount has become payable or having become payable has not been paid. A subscriber shall subscribe monthly to the Fund except during the period when he is under suspension. Subscriptions to the Provident Fund are stopped 3 months prior to the date of superannuation. Rates of subscription shall not be less than 6% of subscriber’s emoluments and not more than his total emoluments. Rate of interest on GPF accumulations with effect from 1.4.2009 is 8% compounded annually and the rate of interest will vary according to notifications of the Government. The Rules provide for drawal of advances/ withdrawals from the Fund for specific purposes.

Deposit linked insurance revised schemeUnder the GPF Rules, on the death of subscriber, the person entitled to receive the amount standing to the credit of the subscriber shall be paid an additional amount equal to the average balance in the account during the 3 years immediately preceding the death of the subscriber subject to certain conditions provided in the relevant Rule. The additional amount payable under that Rule shall not exceed Rs. 60,000/-. To get this benefit, the subscriber should have put in at least 5 years service at the time of his/her death.

7.2.5 Contributory Provident FundThe Contributory Provident Fund Rules (India), 1962 are applicable to every non-pensionable servant of the Government belonging to any of the services under the control of the President. A subscriber, at the time of joining the Fund is required to make a nomination in the prescribed Form conferring on one or more persons the right to receive the amount that may stand to his credit in the Fund in the event of his death, before that amount has become payable or having become payable has not been paid.

A subscriber shall subscribe monthly to the Fund when on duty or Foreign Service but not during the period of suspension. Rates of subscription shall not be less than 10% of the emoluments and not more than his emoluments. The employer’s contribution at that percentage prescribed by the Government will be credited to the subscriber’s account and this is 10%. Rate of interest with effect from 1.4.2009 is 8% compounded annually. The Rules provide for drawal of advances/ withdrawals from the CPF for specific purposes. As in GPF Rules, the CPF Rules also provide for Deposit Linked Insurance Revised Scheme.

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7.2.6 Leave EncashmentEncashment of leave is a benefit granted under the CCS (Leave) Rules and not a pensionary benefit. Encashment of Earned Leave/Half Pay Leave standing at the credit of the retiring Government servant is admissible on the date of retirement subject to a maximum of 300 days. There is no provision under the Rule for payment of interest on delayed payment of Leave Encashment.

7.2.7 Central Government Employees Group Insurance SchemeA portion of monthly contributions paid while in service is credited in a Saving Fund, on which interest accrues. A Government servant while entering service has to apply in Form No. 4 of the above Scheme to the Head of Office, who shall issue a sanction for the payment of subscriber’s accumulation in the Savings Fund segment together with interest and arrange for its disbursement, soon after retirement. Payments under this Scheme are made in accordance with the Table of Benefit which takes in to account interest up to the date of cessation of service. Insurance cover benefit under this Scheme is available to the family in the event of death of the subscriber. No interest is payable on account of delayed payments under this Scheme.

7.3 Welfare Measures for PensionersGovernment of India continue to take various initiatives and measures facilitating the promotion of welfare of the pensioners as well as relief for mitigating the hardship/distress of families of the deceased Central Government servants. These include the following:

Setting-up of a Standing Committee of Voluntary Agencies (SCOVA) to help mobilise voluntary efforts to • supplement the Government action as well as to serve as a useful forum for providing a feedback for the policy initiatives and implementation of welfare programmes for pensioners.Establishment of an Information and Facilitation Counter (IFC) for the pensioners, in Lok Nayak Bhawan at • New Delhi to provide information about the pension-related services, schemes and procedures, and to facilitate not only the lodging of their complaints/applications but also to provide the status on the disposal of their complaints as a single-window service.Setting-up of a separate fund (Compassionate Fund) for providing relief to the families of Government servants • if they are left in indigent circumstances on account of premature death of the Government servant (upon whom they depend for support) and do not receive any other form of death benefits, such as Contributory Provident Fund, Gratuity or Family Pension.Introduction of Family Pension Scheme allowing for payment of pension for life for the family of a Central • Government servant who dies while in service.Introduction of the scheme for Payment of Pension to Central Government Civil Pensioners through Authorised • Banks to ensure a speedy and timely disbursal of pension using the vast net work of their branches.Simplification of procedures to cut delays in the processing and disbursal of pensionary and retirement • benefits.Liberalisation of provisions relating to ex- gratia lumpsum payment to the families of Government servants • who die while in service under certain circumstances.Liberalisation of pensionary awards in the case of death/disability to the Government servants while in service • under certain circumstances. Amendments in relevant rules to facilitate granting of enhanced pension and retirement benefits (Converting • dearness allowance equal to 50% of basic pay as dearness pay and treating the same as emoluments for pension, enhancing the maximum amount of gratuity to Rs. 10 lakhs, increasing the minimum amount of pension to Rs. 3500, increasing the limit for commutation to 40%, treating ‘Dearness Allowance’ as ‘emoluments’ for retirement/death gratuity, etc.)Revising the rate of family pension uniformly as 30% of pay last drawn, and granting uniform percentage of • pension as ‘dearness relief’ for both the serving and the retired Government servants.Making dependent parents, widowed/divorced daughters/unmarried daughter eligible for family pension•

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Simplification of the present procedure of providing medical certificate every five years in the case of physically/• mentally permanently challenged children for life and every three years in the case of temporarily challenged every year to once in a life time and once in every five years respectively from a medical board. Guardians of physically/mentally challenged family pensioners to provide non employment certificate once in a year as against the existing provision of every month.

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Summary A superannuation pension shall be granted to a Government servant who is retired on his attaining the age of • 60 years.The request for invalid pension has to be supported by medical report from the competent medical board.• Extraordinary pension in the form of disability pension/extraordinary family pension may be paid to the • Government servant/his family if disablement/death (or the aggravation of disablement/death) of the Government servant, during his service, are attributed to the Government service.The minimum eligibility period for receipt of pension is 10 year.• Retirement Gratuity is payable to the retiring Government servant.• Death Gratuity is a one-time lump sum benefit payable to the widow/widower or the nominee of a permanent • or a quasi-permanent or a temporary Government servant, including CPF beneficiaries, dying in harnessA retiring Government servant will be entitled to receive service gratuity (and not pension) if total qualifying • service is less than 10 years.A portion of monthly contributions paid while in service is credited in a saving fund, on which interest • accrues.

References Classes of Pension• , [Online] Available at: <http://www.pensionersportal.gov.in/ClassOfPen.asp> [Accessed 9 November 2011].RetirementBenefits• , [Online] Available at: <http://www.pensionersportal.gov.in/retire-benefit.asp> [Accessed 9 November 2011].Panagariya, A., 2008. India: The Emerging Giant, Oxford University Press.• Gaudio, P. E. and Nicols, V. S., • YourRetirementBenefits, John Wiley and Sons.Maheswari, S.C• ., Your Retirement Benefits, [Video Online] Available at: <http://www.youtube.com/watch?v=SVIvUse6n78> [Accessed 9 November 2011].PENSION SCHEME (INDIA), 2011• . Non Pension Scheme, [Video Online] Available at: <http://www.youtube.com/watch?v=pE-kMpwe5do> [Accessed 9 November 2011].

Recommended ReadingEzra, D., Collie, B. and Smith, M. X., 2009. • TheRetirementPlan Solution: TheReinvention ofDefinedContribution, 1st ed., Wiley.McFadden, J. J. and Leimberg, S. R., 2007. • EmployeeBenefitandRetirementPlanning, 10th ed., National Underwriter Company.Dalton, M. A., 2005. • RetirementPlanningandEmployeeBenefitsforFinancialPlanners, 3rd ed., Me: Your Money Education Resource.

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Self Assessment A __________ pension shall be granted to a Government servant who is retired on his attaining the age of 60 1. years.

superannuationa. retireeb. compulsoryc. invalidd.

Which of the following pension may be granted if a Government servant applies for retirement from the service 2. on account of any bodily or mental infirmity which permanently incapacitates him/her for the service?

Family pensiona. Invalid pensionb. Extraordinary pensionc. Compulsory pensiond.

The minimum eligibility period for receipt of pension is__________.3. 7 yearsa. 5 yearsb. 10 yearsc. 6 yearsd.

___________ is payable to the retiring Government servant.4. Benefit gratuitya. Contributory gratuityb. Death gratuityc. Retirement gratuityd.

Which of the following is a one-time lump sum benefit payable to the widow/widower or the nominee of a 5. permanent or a quasi-permanent or a temporary Government servant, including CPF beneficiaries, dying in harness?

Death gratuitya. Benefit gratuityb. Contributory gratuityc. Service gratuityd.

State which sentences is true.6. The Contributory Provident Fund Rules (India), 1962 are applicable to every pensionable servant of the a. Government belonging to any of the services under the control of the President.The Contributory Provident Fund Rules (India), 1962 are applicable to every non-pensionable servant of b. the Government belonging to any of the services under the control of the PresidentThe Provident Fund Rules (India), 1962 are applicable to every pensionable servant of the Government c. belonging to any of the services under the control of the President.The Contributory Provident Fund Rules (India), 1962 are not applicable to every non-pensionable servant d. of the Government belonging to any of the services under the control of the President.

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A retiring Government servant will be entitled to receive ______________ if total qualifying service is less 7. than 10 years

retirement gratuitya. pension gratuityb. service gratuityc. death gratuityd.

For the award of___________, there should thus be a casual connection between disablement and Government 8. service; and death and Government service, for attributability or aggravation to be conceded

family servicea. service pensionb. invalid pensionc. extraordinary pensiond.

A Government servant who is dismissed or removed from service shall forfeit his ________ and gratuity9. pensiona. allowance b. loanc. incomed.

Any Government servant can apply for__________ , three months in advance, only after the completion of 10. twenty years of his qualifying service

valid retirementa. voluntary retirementb. compulsory retirementc. pensiond.

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Chapter VIII

Pension Plan Products

Aim


explain different pension or retirement plan products•

define Life Link Super Pension Plan•

explicate the concept of ICICI Prudential •

Objectives


explain Kotak Retirement Plan•

confer LIC’s Jeevan Nidhi•

elucidate Reliance Life Insurance Retirement Plans•

Learning outcome


explain ING Life Insurance•

enlist the advantages of retirement plan products•

discuss different• pension plans

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8.1 IntroductionRetirement plans provide you with financial security so that when your professional income starts to ebb, you can still live with pride without compromising on your living standards. By providing you a tool to accumulate and invest your savings, these plans give you a lump sum on retirement, which is then used to get regular income through an annuity plan. Given the high cost of living and rising inflation, employer pensions alone are not sufficient. Pension planning has therefore become critical today.

India’s average life expectancy is slated to increase to over 75 years by 2050 from the present level of close to 65 years. Life spans have been increasing due to better health and sanitation conditions in the country. However, the average number of years of employment has not been rising commensurately. The result is an increase in the number of post-retirement years. Accordingly, it has become necessary to ensure regular income for life after retirement, so that you can live with pride and enjoy your twilight years.

As per survey only 4% of India working population- mostly government employees – are covered by pensions. The remaining 96% comprises self employed and salaried professionals who do not have a formal, mandated provision for pensions. This is major reason why people in India require investing into retirement or pension plan.

One more reason that these plans assured that you will continue to earn a satisfying income and enjoy a comfortable lifestyle, even when you are no longer working. There are several government, semi-government as well as private ventures in India, providing mutually beneficial pension schemes to the customers. An increasing need for monitory independence after retirement is helping to increase the number of young Indian professionals moving to invest into their future plans. Inflation is touching the sky literally, hence to fulfill at least minimum need of life after retirement, people need to invest now. With rates rising everyday, you can imagine how high they will be when you are ready to retire. A retirement plan can provide you with a steady income every month, to arm you in the face of rising costs.

8.2 ICICI Prudential ICICI Prudential offers two key retirement plans:

ICICI Prudential

LifeLink Super Pension LifeTime Super Pension

Fig. 8.1 Retirement plans of ICICI Prudential(Source www.iciciprulife.com)

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LifeLink Super Pension and LifeTime Super Pension; both are flexible income cum insurance plans that ensure • you meet all your retirement requirements. So you can retire peacefully from work and live life without any hassles.ICICI Prudential’s LifeLink Super Pension Plan has been especially tailored for individuals who would much • rather make a lump-sum investment than pay premiums at regular intervals for their retirement planning. A cost-effective single premium unit-linked pension policy, LifeLink Super Pension Plan provides potentially • higher returns that ensure your golden years are secure and peaceful.

8.2.1 LifeLink Super Pension Plan

One-time lump sum payment: Make a single investment of as little as Rs. 25,000. • 7 Investment funds: Select among Flexi-Growth, R.I.C.H., Multiplier, Flexi-Balanced, Balancer, Protector and • Preserver, based on your financial goals and risk profile.Pension options: Out of the five annuity options, pick one that will best suit your post-retirement • requirements.Pre-decided retirement age: Determine the age at which you want to start receiving your pensions. The minimum • age of receiving pensions is 45 years.Switch benefit: Switch between funds anytime to adjust your portfolio, based on your goals and risk profiles. • You can switch funds 4 times a year, at no cost. For subsequent switches, you will be required to pay a switch fee of Rs. 100.Tax benefits: Receive up to one-third of the accumulated value as a tax-free lump sum on your retirement day. • Also enjoy tax benefits on the premiums you pay (under u/s 80 CCC).

8.2.2 LifeTime Super PensionICICI Prudential’s LifeTime Super Pension policy is a regular-premium unit linked pension policy. When you invest in this policy, you provide yourself with a guarantee that you will enjoy a fixed income-even when you are no longer working. Take a look at the additional features of ICICI Prudential’s LifeTime Super Pension policy:

Annuity options: Pick one option based on how long you want your annuity to last and the extent of coverage • you want. There are five options to choose.Investment funds: based on your financial goals and risk profile you can decide the investment fund. You can • switch funds 4 times a year, at no cost. For subsequent switches you will be required to pay a switch fee of Rs. 100. Select among:

Flexi-Growth �R.I.C.H. �Multiplier �Flexi balanced �Balancer �Protector �Preserver �

Variations of Sums Assured: Opt for a Zero Sum Assured or a Sum Assured that can be chosen between a • minimum of Rs. 1 lakh and maximum of the annual premium multiplied by the policy term.Tax benefits: Receive up to one-third of the accumulated value as a tax-free lump sum on your retirement day. • Also enjoy tax benefits on the premiums you pay (under u/s 80 CCC) and tax exemptions on death benefits [under u/s 10 (10 D)].

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8.3 Kotak Retirement Plan The Kotak Retirement Income Plan is a savings plan designed to meet your post-retirement needs. It gives you the choice to remain independent even after retirement. The Kotak Retirement Income Plan is a participating plan. The plan comes in two forms:

Kotak Retirement Income Plan

With Cover Without Cover

Fig. 8.2 The Kotak retirement income plans(Source www.kotaklifeinsurance.com)

AdvantagesYou can choose to retire at any age between 45 yrs and 65 yrs.• On retirement:•

You may take a lump sum in cash of up to a third of your Basic Sum Assured or Accumulation Account; �Whichever is higher; and the balance of the benefit you are eligible for will be used to buy an annuity of �your choice.

Annuity options: You may buy an annuity either from Kotak Life Insurance (subject to the choice and rates • available at that time) or from any other insurer.Early retirement benefits: You may opt to retire early, i.e. at any age before the normal retirement date (subject • to the policy being in force for 3 years or your attaining a minimum age of 45 yrs, whichever is later). You can then secure benefits with your Accumulation Account, net of an early retirement charge of 5%. If the early retirement is due to ill health, then you may retire before attaining the age of 45. You can then secure benefits with your full Accumulation Account.Late retirement benefits: You may opt to retire after the retirement date originally selected and select a new • retirement date (subject to a maximum of 65 years). No further premiums will be payable and the death benefit will be equal to the balance in Accumulation Account. (However, all riders will cease at the original retirement date).You can make lump-sum injections into your policy at any time before retirement (such lump-sum injections • during a year may not exceed 25% of the Basic Sum Assured). A Supplementary Accumulation Account will be created for this and will be paid out in the same manner as other benefits.You may exercise the option of paying premiums from the Supplementary Accumulation Account, created for • “lump-sum injections”, if the need arises.

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For a “With Cover” plan, you have the facility of Automatic Cover Maintenance, which ensures that the cover • remains in force even when you miss the premium payments. This facility is available after the first three years of the term.You have the option of paying premiums in quarterly, half-yearly or yearly instalments.• You have the facility of a 15-day free look period.•

8.4 LIC’s Jeevan Nidhi LIC’s Jeevan Nidhi is with profits Deferred Annuity (Pension) plan. On survival of the policyholder beyond term of the policy the accumulated amount (i.e. Sum Assured + Guaranteed Additions + Bonuses) is used to generate a pension (annuity) for the policyholder. The plan also provides a risk cover during the deferment period.

The USP of the plan being the pension can commence at 40 years. The premiums paid are exempt under Section 80CCC of Income Tax Act.

AdvantagesGuaranteed additions: Guaranteed Additions @ Rs.50/- per thousand sum assured for each completed year, for • the first five years.Participation in profits: The policy shall participate in profits of the Corporation from the 6th year onwards and • shall be entitled to receive bonuses declared as per the experience of the Corporation.Benefit on vesting:•

Option to commute up to 1/3rd of the amount available on vesting, which shall include the Sum Assured �under the Basic Plan together with accrued Guaranteed Additions, simple Reversionary Bonuses and Terminal Bonus, if any.Annuity as per the option selected: Annuity on the balance amount if commutation is exercised, otherwise �annuity on the full amount.Annuity options: On vesting, the annuity instalment, mode of annuity payment and type of annuity which �shall be made available to the Life Assured (Annuitant) / Nominee will depend upon the then prevailing Immediate Annuity plan of the Life Insurance Corporation of India and its terms and conditions.

Currently the following options are available under LIC’s immediate annuities:• Annuity for life: The annuity is paid to the life assured as long as he/she is alive. �Annuity guaranteed for certain periods: The annuity is paid to the life assured for periods of 5 or 10 or 15 �or 20 years as chosen by him/her, whether or not he/she survives that period. After the chosen period, the annuity is paid to the life assured as long as he/she is alive.Annuity with return of purchase price on death: The annuity is paid to the life assured as long as he/she �is alive. On the death of the life assured, the purchase price of the annuity is paid as death benefit. The purchase price includes the sum assured under the basic plan, the accrued guaranteed additions and any accrued bonuses, excluding the commuted value, if any.Increasing annuity: The annuity is paid to the life assured as long as he/she is alive. The amount of annuity �increases every year at a simple rate of 3% per annum.Joint life last survivor annuity: The annuity is paid to the life assured as long as he/she is alive. On death of �the life assured, 50% of the annuity is payable to the nominated spouse as long as the spouse is alive.Death benefit on death before annuity vests: On the death of the life assured during the deferment period �of the policy, i.e., before the annuity vests, an amount equal to the Sum assured under the basic plan along with the accrued guaranteed additions, simple reversionary bonuses and terminal bonus, if any, will be paid in a lump sum to the appointed nominee, provided the policy is in force for full sum assured. Nominee will also have the option to purchase an annuity with this amount.

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8.5 Reliance Life Insurance Retirement Plans You are a young and earning individual. The income you earn allows you to enjoy life, your only worry being whether you will be able to continue the same lifestyle after retirement.

A reliance retirement plan will help you save money for your retirement. It ensures that you continue to get some income after retirement thereby ensuring that you do not have to depend on any other person or make any compromises to maintain the same lifestyle.

The income you earn allows you to enjoy life, your only worry being whether you will be able to continue the same lifestyle after retirement. A reliance retirement plan will help you save money for your retirement. It ensures that you continue to get some income after retirement thereby ensuring that you do not have to depend on any other person or make any compromises to maintain the same lifestyle. Invest in a reliance retirement plan today and enjoy life after retirement on your own terms.

Reliance Life Insurance

Reliance Total Investment Plan Series II-Pension

Reliance Super Golden Years Plan

Reliance Super Golden Years Plan Values

Reliance Wealth + Health Plan

Fig. 8.3 Reliance life insurance plans(Source www.reliancelife.com)

8.5.1 Reliance Total Investment Plan Series II - PensionOften we notice in our own lives and those of others, how the smallest alteration makes us change our dreams. And sometimes, we are even forced to let go of these very dreams that have been the cause of hope and happiness in our lives. All of us desire a security, a security that will not just help us hold on to our dreams, but also make them larger and fulfill them. It is this security that Reliance Life Insurance Company Limited promises to bring to you with its Total Investment Plan Series II Pension. We value your dreams in this journey of life. Reliance Total Investment Plan Series- II Pension (TIPS-II Pension) are the eyes to let you see them becoming reality.

Your need for investment keeps changing at different stages of life. We promise to walk through every need with you in the span spent with us and ever beyond that and so on.

Whether it is start of your career, your marriage, birth of child, education of children, their marriage, your old age requirements everywhere you would find Reliance Total Investment Plan Series II- Pension assisting you financially and thereby providing relief mentally too in totality.

Utilise our multifarious flexibility options at par as per your convenience.

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As you progress on this ladder of life we provide you the platform to increase your investment component. With the Reliance TIPS- II Pension you can meet all your financial needs, without the complexity of managing multiple products.

AdvantagesThis is a single premium unit linked pension plan with options to purchase the same plan with reduced • allocation charges in subsequent policy years. Since more premiums are allocated towards investment due to lower allocation charges on subsequent purchases greater would be the returns. Purchasing the same plan in the subsequent years is an option.

1st purchase would be called as “Classic” �2nd purchase would be called as “Silver” �3rd purchase would be called as “Gold” �4th purchase would be called as “Diamond” �5th purchase would be called as “Platinum” �

Once the client purchases the first policy there will full flexibility for the client as to when second and subsequent • purchase can be made and how much premium should be paid for each purchase subject to the following:

The minimum premium on each purchase should be at least Rs. 25,000. �The maturity date on each purchase cannot exceed 70 years. �All polices should mature on maturity date of the first purchase. �The term of polices purchased during second, third, fourth and fifth policy years will be 9, 8, 7 and 6 �respectively.New policy can be purchased only if all the previous polices are in force on the date of purchase of new �policy.

Plan objectiveThe pace setter plan with unmatched flexibility which gives;

Tax benefit under Sec. 80 CCC of Income Tax Act 1961• Investment opportunity with flexibility• Control over your investments•

8.5.2 Reliance Super Golden Years PlanRetirement means different things to different people, while some want to relax and take a trip around the world, some want to start up a venture of their own and pursue a dream harnessed for years. The Reliance Super Golden Years Plan gives you the power and the right kind of solution; a retirement plan that allows you to save systematically and generate the much-needed amount at the right time.

AdvantagesInvest systematically and secure your golden years• A flexible unit-linked pension product that is different from traditional life insurance products with Vesting Age • between 45 & 70 yearsEight different investment funds to choose from• Flexibility to switch between funds• Option to pay Regular, Single as well as Top-up premiums• Flexibility to advance / extend your Vesting Age• Tax free commutation up to one third of Fund Value at Vesting Age•

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8.5.3 Reliance Super Golden Years Plan ValueThe Reliance Super Golden Year Plan Value gives you the right kind of solution. This retirement plan allows you to save systematically to generate the much needed amount worth your future.

AdvantagesInvest systematically and secure your golden years• It is a flexible unit-linked pension product different from traditional products with vesting age between 45 & • 64 yearsEight different investment funds to choose from• Flexibility to advance your vesting age• Flexibility to switch between funds• Tax free commutation of up to one third of fund value at vesting age• Life cover and optional Reliance Term Life Insurance Benefit Rider, Reliance Accidental Death and Total • and Permanent Disablement Rider, Reliance Major Surgical Benefit Rider, Reliance Critical Conditions (25) Rider

8.5.4 Reliance Wealth + Health PlanReliance Wealth + Health Plan, a health insurance plan underwritten by Reliance Life Insurance Company Limited, is designed to work in conjunction with contributions towards savings. The uniqueness of this plan is that it not only provides benefits for covered injuries but also for other injuries by encashment from the unit fund. This plan from Reliance Life offers the Hospitalisation and Surgical Benefits and also covers Critical Illnesses. In short this plan provides you with a personalised quality health cover that fits your lifestyle.

AdvantagesA Unit Linked plan with Unique Savings Component• Twin benefit of market linked return and health protection• Choose from two different plan options• Flexibility to take care of your family’s health• Flexibility to switch between funds / plan options• Option to pay Top-ups• Option to package with multiple riders• Liquidity through partial withdrawals•

8.6 ING Life InsuranceING Life India, in its 10th year of operations, is a part of the ING Group. ING Life entered the private life insurance industry in India in September 2001.

ING Life India distributes its products through two channels, the Tied Agency Force and the Alternate Channel.

Following given are the categories of ING Life Insurance.

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ING Life Insurance

Best Year Retirement Plan

Unit Linked Insurance Plan-Retirement Planning

ING Immediate Annuity Plan

ING Ace Pension Plan

ING Golden Life-Unit Linked Pension Plan

Fig. 8.4 ING life insurance plans(Source www.inglife.co.in)

Best Year’s Retirement Plan ING New Best Years Retirement Plan gives you capital guarantee and provides a safety net to your retirement corpus. This plan also allows you plenty of flexibility as you secure your financial future.

You have the flexibility of choosing when you want the pension payouts to commence to make best use of prevailing market conditions. You can choose to take advantage of the Top-up feature and make additional contributions when it suits you, or a contribution holiday, when you need it, so long as minimum fund balance obligations are met. You have the choice in determining the frequency and timing of premium payments.

It is with capital guarantee while protecting you from market swings.

Helps build a sizeable financial asset for you or your family, in case you’re not around.

As the name suggests, this plan can ensure that your post-retirement years are spent in peace and comfort. And it extends the same comfort to your family by standing as a financial asset, in case you are not around.

This long-term investment plan can truly ensure that your retirement years are the best years of your life.

AdvantagesInvestment amount and returns declared are guaranteed• Tax benefits under 80C / 80CCC• Flexibility in Fund Accumulation• Option to postpone vesting age subject to a vesting age of 70.• Low management fees• Low minimum contribution limit• Accumulated balance in the Individual Pension Account is guaranteed. • Flexibility to•

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Choose the regular contribution to be made each year. �Choose timing and frequency of contributions. �Invest additional amounts in the form of Top-up contributions. �Take a contribution holiday when you are unable to meet the regular contribution. �Start the pension whenever you wish. �Postpone your retirement date to make best use of market conditions. �Take up to one-third of the balance amount at the chosen retirement date as tax-free lump sum. �Purchase annuity from IVL or any other insurer. �

Product featuresEligibility•

Minimum entry age: 18 yrs �Maximum entry age: 65 yrs �

Minimum Premium Payable• Minimum Premium Amount is Rs.5000/- �Minimum Top-Up contribution is Rs.2000/- �

Vesting Age• Minimum vesting age: 45 yrs �Maximum vesting age: 70 yrs �

Deferment Period• Minimum deferment period: 5 yrs �Maximum deferment period: 52 yrs �

New Future Perfect (Unit Linked Insurance Plan – Retirement Planning)Highly flexible unit linked insurance plan (ULIP) with systematic withdrawals for a perfect retirement planning.

The ING Life New Future Perfect Unit Linked Insurance Plan has been carefully put together to enable you get the maximum benefits. It not only provides you with flexibility in terms of premium amounts and frequency, but also offers you an investment opportunity that’s just perfect for your long-term financial future.

The ING Life New Future Perfect Unit Linked Insurance Policy offers you flexibility in terms of how much you want to pay, how often you want to pay and the choice of investment pattern. After all, what you are looking for is not just life cover but something that covers all of what life has to offer.

AdvantagesFlexible Life Cover• Flexible Investment Options• Regular income through systematic withdrawal benefit after age 60•

Product featuresEligibility•

Minimum entry age: 8 years �Maximum entry age: 55 years (Subject to Premium Payment Term) �Maximum maturity age: 80 years �

Premium Payment Terms• Choose premium paying terms of 5-25 years �

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Premium Payment Options• Annual, half-yearly, quarterly or monthly �

Minimum Premium Payable• Annual : Rs. 15,000 �Half-Yearly : Rs. 8,000 �Quarterly : Rs. 4,000 �Monthly : Rs. 1,500 �Top ups Rs. 5,000 �

ING Golden Life (Unit Linked Pension Plan)A retirement solution to help you realise the retired life of your choice, with a wide range of Benefits that are personalised to suit your needs.

The ING Golden Life is a Unit Linked Pension plan. You need to choose the age at which you wish your pension should start (called the Vesting Age). The Policy plan allows you the convenience of choosing the Premium and the duration you wish to pay.

It allows you to manage your investments as per your risk preference. You can opt to invest the premiums amongst the funds offered i.e. Pension Debt, Pension Equity or Pension Liquid OR you can choose the Life Stage Investment Program which automatically adjusts your fund allocation to secure your investments as your retirement age approaches.

AdvantagesLoyalty Units: to help grow your funds faster• Life Stage Investment Program: to manage investments as per your risk preference• Flexibility to choose your retirement age• Flexible Premium options• Flexibility to exercise the pension option on the chosen retirement age• Tax benefits under section 80C / 80CCC and 10(10A)•

Product FeaturesEligibility•

Under Regular Premium Option �Minimum entry age: 18 yrs – Maximum entry age: 65 yrs –

Under Single Premium Option �Minimum entry age: 18 yrs –Maximum entry age: 70 yrs –

Premium Payment Options �Single: One-time –Regular: Annual, half-yearly, quarterly or monthly –

Minimum Premium Payable �Minimum Premium under Single premium option is Rs.45,000/- –For Minimum Premiums under Regular premium options please refer to the brochure –

Minimum Top-Up is Rs.5,000/- �

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Vesting Age• Minimum Vesting Age: 45 years �Maximum Vesting Age: 75 years �

Vesting Period• Under Single Premium Option �

Minimum: 5 yrs –Maximum: 57 yrs –

Under Regular Premium Option �Minimum: 10 yrs �Maximum: 57 yrs �

ING Immediate Annuity PlanRetirement is the golden period when you want to make your wishes come true which otherwise had taken a back seat in meeting key milestones of the life. To make this period really tension free, you need to arrange for guaranteed regular income for the rest of your life; not let anything disturb your years of enjoyment, least of all market volatility disturbing your peace.

ING Life offers the Immediate Annuity Plan with Return of Purchase Price. For years, you have been saving for your retirement and now you can use those savings to get a guaranteed life time income. All you have to do is invest your savings at one go in this Policy and choose the frequency of receiving the Annuity (monthly/quarterly/half-yearly /yearly) and we will start paying your regular income. The Annuity rates are dependent on the age, gender and the Annuity frequency mode selected by the Annuitant.

AdvantagesAnnuity Payments:• Lifelong fixed annuity payouts guaranteed for life.Flexibility:• Flexible options of receiving payouts annually, semi annually, quarterly or monthly.Death Benefit:• On death of Annuitant, Purchase price or a part there of will be paid to the nominee.Simplicity:• No medical examination, large volume discounts.

Product features

Entry Age (age last birthday) Maximum: 70 Years Minimum: 45 Years

Age at maturity Not Applicable

Premium Paying Term (PPT) Single (One Time Payment)

Policy Term Whole of Life

Purchase Amount Minimum: Rs 50,000Maximum: No Limit

Minimum Payout Amount Rs.1000

Annuity Frequency Mode Yearly, Half Yearly, Quarterly and Monthly

ING Ace Pension PlanING Ace Pension is a non-linked non-participating limited premium payment (3 years) pension plan that provides guaranteed additions for the entire policy term of 10 years. The Guaranteed Vesting Benefit at the end of the Policy Term will be used to purchase annuity which will help you in your post retirement years.

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ING Ace Pension is a special plan that offers guaranteed returns with a convenient 3 year premium commitment and comes with attractive tax benefits. This simple investment plan is available only for a limited period.

AdvantagesGuaranteed Additions of 8.75(%) p.a. compounded every year• Limited premium payment period of 3 years• Guaranteed Vesting Benefit at the end of the 10 years•

Product features

Age at Entry Minimum: 35 YearsMaximum: 60 Years

Age at Vesting Minimum: 45 YearsMaximum: 70 Years

Policy Term 10 years

Premium Paying Term (PPT) 3 years

Premium Payment Mode Annual Only

Maximum Annual Premium No Limit

Vesting Sum Assured 2 times the Annual Premium

Guaranteed Additions 8.75% per annum

Life Cover Premiums paid compounded at 3% per annum

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SummaryRetirement is an inevitable phase of life and everyone needs to plan for it.• There are various retirement/pension plans available in the market these days.• Be careful while buying any of the pension plans, read the brochure and terms and conditions section • carefully.Buy the policy only when you are fully convinced about its benefits.• The Kotak Retirement Income Plan is a savings plan designed to meet post-retirement needs.• Reliance Wealth + Health Plan is designed to work in conjunction with contributions towards savings. The • uniqueness of this plan is that it not only provides benefits for covered injuries but also for other injuries by encashment from the unit fund.The ING Life New Future Perfect Unit Linked Insurance policy offers you flexibility in terms of how much • you want to pay, how often you want to pay and the choice of investment pattern.Reliance Total Investment Plan Series II – Pension• is a Single premium unit linked pension plan with options to purchase the same plan with reduced allocation charges in subsequent policy years.ING Golden Life (Unit Linked Pension Plan) provides flexibility to exercise the pension option on the chosen • retirement age.

ReferencesBaker, A.J., Logue, D.E. and Rader, J.S., 2005. • Managing pension and retirement plans: a guide for employers, administrators,andotherfiduciaries, Oxford University Press.Clifford, D., 2010. • Plan Your Estate, 10th ed., Nolo.ING Life Insurance, • Life Insurance Plans. [Online] Available at: <www.inglife.co.in> [Accessed 25 July 2011].Reliance Life Insurance Plans• [Online] Available at: <www.reliancelife.com> [Accessed 25 July 2011].Life Insurance Plans, 2010. • How To Find Life Insurance. [Video online] Available at: <http://www.youtube.com/watch?v=-S26KFydZqw> [Accessed 25 July 2011].Ramsey, D., 2009. • Life Insurance Explained - Slams Whole Life. [Video online] Available at: <http://www.youtube.com/watch?v=3b-q8MLfH2w&NR=1> [Accessed 25 July 2011].

Recommended ReadingMcGill, D.M., Brown, K.N. and Haley, J. J., 2010. • Fundamentals of private pensions, 9th ed., Oxford University Press.Ezra, D.D., Collie, B. and Smith, X., • TheRetirementPlanSolution:TheReinventionofDefinedContribution, John Wiley and Sons. Mackenzie, G.A., Gerson, P.R. and Cuevas, A., 1997. • Pension regimes and saving, International Monetary Fund.

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Self Assessment_____________ provides you with financial security so that when your professional income starts to ebb, you 1. can still live with pride without compromising on your living standards.

Retirement plansa. Retirement investmentsb. Mutual fundsc. Pension d.

LifeLink Super Pension and LifeTime Super Pension are two plans of ____________.2. ING Lifea. ICICI Prudentialb. Kotak Mahindrac. LIC of Indiad.

______________ is for individuals who would much rather make a lump-sum investment than pay premiums 3. at regular intervals for their retirement planning.

LifeLink Super Pension Plana. Life Time Super Pension Planb. Kotak Retirement Plan with coverc. Kotak Retirement Plan without coverd.

Pick one option based on how long you want your annuity to last and the extent of coverage you want this 4. benefit is provided in _________________.

Kotak Retirement Plan with covera. Kotak Retirement Plan without coverb. Life Time Super Pension Planc. Retirement pland.

Kotak retirement income plan has two types, _____________________.5. With premium, without premiuma. With cover, without coverb. With fund, without fundc. With gratuity, without gratuityd.

For a ____________ plan, you have the facility of Automatic Cover Maintenance, which ensures that the cover 6. remains in force even when you miss the premium payments.

LIC’s Jeevan Nidhia. With Coverb. Without coverc. Reliance Life Insurance Pland.

__________________ distributes its products through two channels, the Tied Agency Force and the Alternate 7. Channel.

Kotak Mahindraa. LIC of Indiab. New India Assurancec. ING Life Indiad.

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Eligibility of Best year’s retirement plan is minimum ____ years and maximum ___ years.8. 18 / 65a. 16 / 66b. 21 / 70c. 30 / 85d.

Eligibility of New Future Perfect is minimum ____ years and maximum ___ years.9. 8 / 55a. 10 / 50b. 16 / 60c. 21 / 67d.

The uniqueness of _________________ plan is that it not only provides benefits for covered injuries but also 10. for other injuries by encashment from the unit fund.

ING Life New Future Perfect Unit Linked Insurance policya. Reliance Wealth + Health Planb. ING Golden Lifec. The Kotak Retirement Income Pland.

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Case Study I

Retirement solutions -ICICI Prudential

The retirement solutions category remained virtually untapped by the Indian Insurance agencies; until ICICI Prudential decided to build and explore this treasure. ICICI Prudential used smart marketing strategy to exploit this opportunity to its advantage. The challenge was to re-position the traditional concept of retirement planning and thus create relevance for it among the 30-40 years age group, as well as inducing them to invest in retirement planning early in life.

The following discusses how ICICI Prudential used smart marketing strategy to exploit this opportunity to its advantage.

Market scenario With increasing life expectancy on one hand and rising inflation and medical costs on the other, the need for planning one’s retirement was emerging as an important one. However, it was quite surprising to know only 11 per cent of India’s total working population was adequately covered for post-retirement life. This was mainly due to low awareness of and attitudinal barriers with respect to these issues among consumers.

The opportunity About 90 per cent of the working population in India was without retirement cover. Of this, a sizeable portion belonged to the age group of 30-40 years - a big market left unexploited so far. Even the market leader LIC, which has been in the country for decades, had failed to truly drive growth of the retirement products category. Proof being the mere 4.16 per cent contribution of pension products to its entire portfolio (as of end 2002).

The barriers The task of capturing the unexploited market however, turned out to be an uphill one. The first barrier was low awareness of the need for early retirement planning among consumers. Add to it the consumer’s notion that planning for retirement starts only in your 50s. The bigger issue however, was the consumer’s perceptions and fears as far as retirement was concerned. The word ‘retirement’ it brought to mind all the negatives associated with old age – loss of independence (social, financial and physical), causing ‘avoidance’ or putting off decisions regarding the same.

The challenge To re-position the traditional concept of retirement planning and thus create relevance for it among the 30-40 yrs age group. To change the behaviour, inducing consumers to invest in retirement planning early in life.

Campaign objectives Bring the concept of planning for retirement into the consideration set of 30-40 year old working men/ women • thereby creating a new market. 50 per cent of pensions contributions to come from persons below 40 years sales and market share targets within • six months post campaign (for the period Sep 2002 to Mar 2003):

Sales target: INR 400 million �Share of total pensions market: 10 per cent �Contribution of pensions to portfolio: 20 per cent �

Creative strategy Consumer Insight “Retirement is a long way off – why plan for it now?” “Retirement means the end of all good things in life”. Creative strategy to a younger target group, for whom retirement is identical with growing old, the strategy was to offer a fresh perspective by mirroring the never say die attitude of the 35 year old. If age doesn’t stop him from sharing in the joys of life now, why should it stop him later? ICICI Prudential Retirement solutions help you plan early for retirement, ensuring that you will continue to live life the way you always wanted to. The slogan is “Retire from work – not life!”

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Other communication programs The steps of share gain through changing consumer attitudes and behaviour, called for a multi-dimensional communication strategy that went beyond traditional mass media.

Retirement Solutions Seminars• Direct Marketing Campaign: More than 15 databases were carefully chosen to accurately target the 30-40 year • old customers of/subscribers to ICICI Bank credit card holders, Safety Bond holders, Money control are few of the databases that were used.Retirement Planner• Retirement calculator •

Media strategy The overriding objective of the media strategy was customer interaction through various touch points using a 24-hour cycle. So a multi media strategy was developed to contact the target at every possible touch point.

Television: This was the main medium for reach, impact and demonstrates the emotional pay off. For the first • month of launch a high reach, high frequency plan was implemented, followed up with three months of sustained activity. The activity started with 40-second commercials and then moved to 20 and 30 seconds edits aimed at increasing frequency.Print: Press reinforced the rational benefit of saving early to cushion your retirement by highlighting the product’s • comprehensive features. Radio: The new FM channels launched in the previous year were explored to reach audiences out of home. The • spots were aired so as to get the morning and evening office-going traffic. Outdoor: A high visibility-high impact outdoor strategy was implemented across 21 cities.• Internet: Used innovative methods to seek responses via click-through. • Direct Marketing: Mailers and brochures played the dual role of educating the consumer on the rationale behind • planning early for retirement and the advantages of ICICI Prudential Retirement solutions. Public Relations: Was effectively used to educate consumers on early retirement planning, making them more • receptive towards the brand’s communication.Competitive Media Spends: The combined spend of just the top 2 competitors put together amounted to Rs 16 • crores approx. comparatively expenditure on the ICICI Prudential campaign was Rs 4.8 crores.

Source: <http://www.etstrategicmarketing.com/SMJan-Feb05/CaseStudy.htm>

QuestionsWhat was the first barrier in retirement planning?1. AnswerThe first barrier was low awareness of the need for early retirement planning among consumers.

What is the main objective of the campaign?2. AnswerBring the concept of planning for retirement into the consideration set of 30-40 year old working men/ women thereby creating a new market.

What is the theme line of the ICICI Prudential policy for advertisement?3. AnswerThe slogan is Retire from work – not life!

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Case Study II

CRM Tool Helps Retirement IFA Firm Launch in Just 14 Weeks

Just Retirement Solutions, a specialist financial adviser and part of the Just Retirement Group, operates in a highly competitive sector of the United Kingdom financial services industry. Due to its choice of customer relationship management (CRM) technology, the firm which specialises in equity release advice for home owners was launched in 2006. Just Retirement has successfully teamed up with a leading provider of value for money services in the United Kingdom for the over 50s, to create an Equity Release Service for homeowners. Just Retirement Group has enjoyed a meteoric rise since start up in 2004 as a life insurance company, and from the beginning has used a Microsoft® environment for its line-of-business applications. Just Retirement Solutions is making a valuable contribution to the success of the group.

Just Retirement Solutions, a specialist financial adviser and part of the Just Retirement Group, operates in a highly competitive sector of the United Kingdom financial services industry. Due to its choice of customer relationship management (CRM) technology, the firm which specialises in equity release advice for home owners was launched in 2006. It took just 14 weeks of development time.

The company has since successfully teamed up with a leading provider of value for money services in the United Kingdom for the over 50s, to create an Equity Release Service for homeowners. The product helps older people use some of the value of their homes to meet their needs in old age without losing the roof over their heads.Just Retirement Group has enjoyed a meteoric rise since start up in 2004 as a life insurance company, and from the beginning has used a Microsoft® environment for its line-of-business applications. Just Retirement Solutions is making a valuable contribution to the success of the group. It was launched on junior market AIM in November 2006 by founder and chief executive Mike Fuller, a veteran insurance executive who was behind GE Life and Britannic Retirement Solutions. The group is now valued at £587 million (U.S. $1.18 billion).

The firm’s success is mainly due to its strategic use of IT in shaping the business. Alan Thomasson, Head of IT Solutions, Just Retirement Solutions, faced a major challenge over the choice of a technology for the start up. “We use Microsoft throughout the organisation, but Microsoft does not sell a specific application to support advisers. However, the Microsoft and CRM solutions provided an excellent opportunity to build a much more agile and secure solution than a specific independent financial adviser (IFA) package from another vendor. Microsoft was the only way for us to achieve our requirements. It was critical to the success of the business that we launched Just Retirement Solutions within a short timescale. Success would only be assured if we pulled out all the stops.”

Before implementation began, Just Retirement rejected all other non-Microsoft options as either too expensive or not flexible enough for its workforce. “The preferred option of using Microsoft Dynamics™ CRM version 3 meant we could take advantage of our existing investments in Microsoft technology” says Thomasson. “One great advantage was ease of integration and the support we received from Microsoft Gold Certified Partner 2B.net. All other options would have taken a minimum of six months.”

Customisation meets special needs of IFAThe application has been significantly customised to accommodate the workflow processes of Just Retirement • Solutions’ specialist business.Microsoft Services also provided help with the higher level architecture and a valuable health check. There are • 25 people using the application at head office and a 15-strong field sales force using Tablet PCs.The Tablet PCs capture personal data using Microsoft Office InfoPath® 2003 forms that synchronise with the • CRM system and automatically create records suitable for processing and audit by compliance.“The solution supports the input and administration of sales leads through to completion, and we are using it to • manage all the compliance routines within the IFA,” says Thomasson. “The tool uses Microsoft SQL Server™ 2005 database integrated with Microsoft Exchange Server 2003 communication and collaboration server.

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“The solution was very easy to develop. Four people were involved in the original delivery, none of whom had • any knowledge of Microsoft Dynamics CRM before July 2006.”Just Retirement is particularly well served by XML messaging formats. “Microsoft Dynamics CRM is used to • provide XML services to our affinity or lead providers helping them to call Web services and receive information about the status of cases they have provided,” says Thomasson. “The other areas where Microsoft CRM put together with products such as Active Directory® directory service for identity management and security, and Exchange Server 2003, which will soon be upgraded to Microsoft Exchange Server 2007.”Critically, back-office information workers use Microsoft Dynamics CRM to manage compliance records against • sales, supporting all quality assurance processes that are required by the United Kingdom Financial Services Authority.

The system will eventually support 75 users and will easily scale from this point to meet the company’s future needs for additional hardware.

Source: <http://www.microsoft.com/casestudies/Microsoft-Dynamics-CRM-3.0/Just-Retirement-Solutions/CRM-Tool-Helps-Retirement-IFA-Firm-Launch-in-Just-14-Weeks/4000000709>

QuestionsWhat was the major challenge over the choice of technology, faced by Just Retirement Solutions?1. What is the advantage in choosing Microsoft Dynamics™ CRM version 3?2. What are the other areas where Microsoft CRM can be put together with other products?3.

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Case Study III

Planning Debts

Ritu’s 23 and just landed her dream job. It’s the first time she’s earning proper money and there’s plenty she wants to do with it! A car, a place of her own, some fantastic shoes – and that’s just for starters. But she does realise she can’t do everything straightaway. And, what’s more, there’s the future to think about too. Ritu’s been living with her parents. Although this means she’s been lucky enough to keep her debts to a minimum, she knows what she really wants is a place of her own.

She decides to set up a monthly savings account so she can gradually build up a deposit. That way she won’t be tempted to spend the money. Her dad had pointed out an article about high interest rate on selected term for fixed bank deposits in the paper; to her surprise it seems a really simple way of saving. After calling and discussing with the customer service desk of her banker regarding interest payable on various duration, she diverted her fund in her Savings Bank Account to Fixed Deposit Account and that’s it.

Although she’s young, Ritu knows she’s got to think longer term too. She’s already decided to make additional contribution on the Occupational Pension Scheme with her employer so that she can have the benefit of aiming for higher accumulated amount at retirement. But she also wants to get some professional advice. She wants to meet about three financial advisers, decides the one she feels comfortable with and then gets on with planning for the rest of her life.

Source: <http://www.six-steps.in/casestudies_latha.aspx>

QuestionsHow Ritu decides to plan her saving?1. What are her plans for long term saving?2. What other plans do you suggest for wise saving?3.

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Bibliography

ReferencesAdams, G. A. and Beehr, T. A., 2003. • Retirement: reasons, processes, and results, Springer Series, revised, Springer Publishing Company.Baker, A. J., Logue, D. E. and Rader, J.S., 2005. • Managing pension and retirement plans: a guide for employers, administrators,andotherfiduciaries, Oxford University Press.Baldwin, B.G., 2001. The new life insurance investment advisor, 2nd ed., McGraw-Hill Professional.• Classes of Pension• , [Online] Available at: <http://www.pensionersportal.gov.in/ClassOfPen.asp> [Accessed 9 November 2011].Clifford, D., 2010. • PLAN YOUR ESTATE, 10th ed., Nolo.Ehowmoney. • Concept of insurance. [Online] Available at: <http://www.ehow.com/facts_7199060_concept-insurance.html#ixzz1SdXbzK7H> [Accessed 25 July 2011].Farm bureau financial services. • Retirement services [Online] Available at: <http://www.fbfs.com/content/investments/retirement-funding/default.aspx> [Accessed 22 July 2011].Farrell , C., • Retirement Planning [Online Video] Available at: <http://www.youtube.com/watch?v=QQbq9aC9dt0>[Accessed 8 November 2011].Financial Straight Talk, 2009. • Financial Investment Retirement Plan: 401k, Bonds, Mutual Funds. [Video online] Available at: <http://www.youtube.com/watch?v=Po_q0dJcMOY> [Accessed 25 July 2011].Gaudio, P. E. and Nicols, V. S., • YourRetirementBenefits, John Wiley and Sons.Geobeats, 2011. • Strategies to Boost Retirement Savings. [Video online] Available at: < http://www.youtube.com/watch?v=UNo3uWwhAlA> [Accessed 25 July 2011].Gibberman, D. L., 2002. • Planning to retire in comfort, 4th ed., CCH.Hamilton, M. and Carrick, R., 2010. • Maximizing your retirement savings efforts. [Video online] Available at: < http://www.youtube.com/watch?v=33f4VFzWqBs>. [Accessed 25 July 2011].Hardy, E. R., Huebner, S. S., Michelbacher, G. F. and Mudgett, B. D., 2008. • Insurance Modern business, Alexander Hamilton Institute.Hatch retirement services. • Individualized investment strategies. [Online] Available at: < http://hatchplan.com/InvestmentStrategies.html> [Accessed 20 July 2011].ICRA Online. • Mutual Fund Basics [Online] Available at: <http://www.mutualfundsindia.com/mfbasic.asp> [Accessed 25 July 2011].In time finance planning services pvt. Ltd., • The squeeze and spend strategy. [Online] Available at: < http://intimefinance.com/2009/07/the-squeeze-and-spend-strategy/> [Accessed 25 July 2011]. ING Life Insurance, • Life Insurance Plans. [Online] Available at: <www.inglife.co.in > [Accessed 25 July 2011].Investing insurance. • Investing and Retirement Planning Tips: Personal Finance 101 (Part 1). [Video online] Available at: <http://www.youtube.com/watch?v=4waUNTIq-fg> [Accessed 25 July 2011].Investopedia, • Phases of retirement [Online] Available at: <http://www.investopedia.com/terms/p/phases-retirement.asp> [Accessed 20 July 2011].Investor words.com. • Health Insurance Tips for Self-Employed People. [Video online] Available at: <http://www.investorwords.com/videos/?155699244> [Accessed 25 July 2011]. Investor words.com. • Insurance. [Online] Available at: <http://www.investorwords.com/2510/insurance.html#ixzz1SdVYPbSE> [Accessed 25 July 2011].Kaplan L. J., 2004. • Retiring right: planning for a successful retirement, Square One Publishers.Karp, G., 2008. • Living Rich by Spending Smart: How to Get More of What You Really Want, Addison-Wesley Professional.

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Knuckey, D., 2002. • Conscious Spending for Couples: Seven Skills for Financial Harmony, John Wiley and Sons.Life Insurance Plans, 2010. • How To Find Life Insurance. [Video online]. Available at: < http://www.youtube.com/watch?v=-S26KFydZqw> [Accessed 25 July 2011].Maheswari, S.C• ., Your Retirement Benefits, [Video Online] Available at: <http://www.youtube.com/watch?v=SVIvUse6n78> [Accessed 9 November 2011].marcellolisi, 2010. • How to Plan for your Retirement - Planning your Retirement - Early Retirement [Online Video] Available at: <http://www.youtube.com/watch?v=A8lg4mkiLzU>[Accessed 8 November 2011].Master your money. • Where to invest for retirement planning? [Online] Available at < http://www.thewealthwisher.com/2011/01/11/where-to-invest-for-retirement-planning/> [Accessed 25 July 2011].Menachery, G., 1987. • Retirement in India: a psycho-social study. Vianney Publications.Morries, V.B. and Morris, K. M., 2011. • Investing for Retirement, Lightbulb Press.Mrgeorged, 2009. • Top Gear The Stig revealed Full. [Video Online] Available at:<http://www.youtube.com/watch#!v=eTapK5dRaw4> [Accessed 23 June 2009].Noth, C., • Life Insurance Awareness Month 2009. [Video online] Available at:<http://www.youtube.com/watch?v=Cz4DF9L2fpg&playnext=1&list=PLD1FFCA99D77B1E1B> [Accessed 25 July 2011].Panagariya, A., 2008. India: The Emerging Giant, Oxford University Press.• PENSION SCHEME (INDIA), 2011• . Non Pension Scheme, [Video Online] Available at: <http://www.youtube.com/watch?v=pE-kMpwe5do> [Accessed 9 November 2011].Ramsey, D., 2009. • Life Insurance Explained - Slams Whole Life. [Video online]. Available at: < http://www.youtube.com/watch?v=3b-q8MLfH2w&NR=1> [Accessed 25 July 2011]. Ramsey, D., • Retirement Investment Money Makeover. [Video online] Available at: < http://www.youtube.com/watch?v=cTxrygfOVgI> [Accessed 22 July 2011].Rediff business, 2005. • Insurance & income tax rebates. [Online] Available at: <http://www.rediff.com/money/2005/feb/01perfin.htm> [Accessed 25 July 2011].Reliance Life Insurance Plans• [Online] Available at: <www.reliancelife.com>. [Accessed 25 July 2011].RetirementBenefits• , [Online] Available at: <http://www.pensionersportal.gov.in/retire-benefit.asp> [Accessed 9 November 2011].Retirement funding now, 2008. • Retirement Funding Now.com – Introduction. [Video online] Available at: <http://www.youtube.com/watch?v=krKuQSRSeK4> [Accessed 22 July 2011].Retirement Planning in India,• [Online] Available at: <http://www.madrasi.info/retirement-planning-in-india.html> [Accessed 8 November 2011].Retirement Planning, • [Online] Available at: <http://dadadadi.org/publication-retirement-plan.html> [Accessed 8 November 2011].Sinha, • Financial Planning: A Ready Reckone, Tata McGraw-Hill Education.Stain, B., 2007. • Ben Stein Talks Retirement - Part 1. [Video online] Available at: <http://www.youtube.com/watch?v=3eAo3IwJx0A> [Accessed 22 July 2011].TransformRetirement, 2011. • How to manage your retirement transition successfully. [Video online] Available at: <http://www.youtube.com/user/TransformRetirement?blend=7&ob=5> [Accessed 22 July 2011]. Your money and finance retirement planning. • Funding retirement [Online] Available at: <http://www.your-money-and-finance.com/funding_retirement.html> [Accessed 22 July 2011].

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Recommended ReadingAmbachtsheer, K. P., 2007. • Pension Revolution: A Solution to the Pensions Crisis, 1st ed., Wiley.Ameriks, J. 2008. • Recalibrating Retirement Spending and Saving, Oxford University Press.Armstrong, F. and Brown, P., 2009. • Save Your Retirement: What to Do If You Haven’t Saved Enough Or If Your Investments Were Devastated by the Market Meltdown, FT Press.Baldwin, B. G. 2001. • The new life insurance investment advisor, McGraw-Hill Professional.Carlson, R.C., 2004. • The new rules of retirement: strategies for a secure future, John Wiley and Sons. Dalton, M. A., 2005. • RetirementPlanningandEmployeeBenefitsforFinancialPlanners, 3rd ed., Me: Your Money Education ResourceDonogue, W. E., 1987. • Donoghue’s Investment Tips for Retirement Savings, HarperCollins. Ezra, D. D., Collie, B. and Smith X., • TheRetirementPlanSolution:TheReinventionofDefinedContribution, John Wiley and Sons. Garrett, S. and Cornell, C., 2010. • 76 Tips for Investing in an Uncertain Economy For Canadians For Dummies, Camilla Publisher. Graney, P. J., Storey, J.R., Purcell, P. J. and Gravelle, J.G., 2003. • Retirement Savings Plans, Nova Publishers.Green, M. A. and Rowell, A.C., 2007. • Understanding Health Insurance: A Guide to Billing and Reimbursement, 9th ed., Cengage Learning.Hoffman, E., 2002. • The Retirement Catch-Up Guide: 54 Real-Life Lessons to Boost Your Retirement Resources Now, Newmarket Press.Huang, N.S. and Finch, P, 2002. • The Smart Money guide to long term investing: how to build real wealth for retirement and other future goals, 2nd ed., John Wiley and Sons.Mackenzie, G. A., Gerson, P.R. and Cuevas, A., 1997. • Pension regimes and saving, International Monetary Fund.McFadden, J. J. and Leimberg, S. R., 2007. • EmployeeBenefitandRetirementPlanning, 10th ed., National Underwriter Company.McGill D. M., Brown, K.N. and Haley, J. J., 2010. • Fundamentals of private pensions, 9th ed., Oxford University Press.Munnell, A. H. and Sass, S. A., 2009. • Working Longer: The Solution to the Retirement Income Challenge, Brookings Institution Press.Rejda, 2005. • Principles of Risk Management and Insurance, Pearson Education India.Zevnik, R.W., 2004. • The Complete Book of Insurance: Understand the Coverage You Really Need, Sphinx Pub.

Retirement Solution

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Self Assessment Answers

Chapter Ia1. b 2. b3. c4. d5. a6. d 7. c8. a9. c10.

Chapter IIa1. b2. c3. d4. a5. b6. c7. d8. a9. b10.

Chapter IIIa1. a2. b3. c4. b5. d6. a 7. d8. c9. a10.

Chapter IVa1. b2. c3. d4. b5. c6. a7. b8. c9. c10.

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Chapter Va1. b2. c3. c4. a5. c6. d7. a8. c9. d10.

Chapter VIa1. b2. c3. d4. a5. c6. a7. b8. c9. a10.

Chapter VIIa1. b2. c3. d4. a5. b6. c7. d8. a9. b10.

Chapter VIIIa1. b2. a3. c4. b5. b6. d7. a8. a9. b10.

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