Retirement Lect. Persentation

Retirement Planning
&
Employee Benefits (RPEP)
Website- www.fpa.edu.in | e-mail- fpa@fpa.edu.in 1

Reference Material for Presentation
 FPA Retirement Planning & Employee Benefits

Module Book
 FPA Retirement Planning & Employee Benefits
Workbook
 Google Research

Training Objective
 To Understand the Scope and Significance of

Retirement Planning & Employee Benefits in Financial
Planning
 To Provide Exam based Review of the Subject matter
 To create Certified Financial Planner who can address
the Retirement Planning & Employee Benefits needs
of their clients in a holistic manner.
 To clear the RPEP Exam

Module Topics
 Basic Concepts of Retirement Planning & Wealth Creation
 Retirement Planning Strategies -Needs Analysis
 Income Replacement Method
 Expense Method
 Retirement Benefit Scheme : (Individual Employed in

Organization)
 Defined Benefit Plan
 Defined Contribution Plan
 Other Related Topics

 Small Saving Scheme
 Pension Sector Reforms (New Pension Scheme)

Retirement Planning Basic Concepts
 What is Retirement Planning?

 Importance of Retirement Planning?
 Certified Financial Planner’s role in Retirement
Planning
 Wealth Creation

What is Retirement Planning?
 Retirement years can be defined as those
years where the client is no longer in a
position to work due to various reasons or
gradually begins to reduce his / her work
levels.
 In other words, it is a process of ensuring the
availability of sufficient financial resources
without compromising on the desired lifestyle
during the retirement years.

Importance of Retirement Planning
 Focuses on Long-term requirement of funds during
retirement years. It affects how we intend to live
today by bringing into sharp focus how we wish to
live in the future.
 Includes Life Planning, Wealth Creation and Wealth
Management
 People are living longer (more people in their 60’s will
live well into their 80s and 90s)
 Inflation slowly erodes wealth
 Employers no longer offering traditional pension
plans

CFPCM’s role in Retirement Planning
The Financial Planner looks to address the following
fundamental questions for his clients
How much does the client have today?

 Net worth statement (today v/s retirement day)
 How much will the client need on retirement?
 Retirement budget or Cash flow statement, Shortfall,
Surplus
 Develop a strategy to help the client build on Net
worth today into Money needed on retirement day

Issues in Financial Planning process:
 Start too late, invest too little, invest too conservatively.
 Accumulation time, Distribution time:
 Case1: If the Retirement age is early, Accumulation phase
will be shorter and Distribution phase will be longer as a
result: Client will need extra investment to achieve his
retirement goals
 Case2: If the Retirement age is delayed, Accumulation
phase will be longer and Distribution phase will be shorter
as a result: Client will require a smaller investment amount
to achieve his retirement goals
 Self directed plans (Investment Perspective only)
Self employed, unorganized sector workers rely on self funded
retirement plans like pension plans of mutual funds, life
insurance companies, public provident fund

Wealth Creation
What is Wealth?
Is Wealth all about………
 Having enough money to buy whatever and individual wants
without having to worry about price ?
 Having enough money to retire now and live a millionaire lifestyle?
 How about being rich not just in cash and material assets, but also
enjoying great health, fulfilling relationships, a life filled with
activities you love, freedom to manage your time and resources as
you choose, and more…
From Financial Planning Perspective :
“Wealth Creation is all about creating Financial Assets,
Managing Investments and Generating Income Streams.”

Principles of Building Wealth
The core principles for building lifetime wealth through financial
assets are:
 Start Investing as early as possible in life
 Time value of money
 Sir Albert Einstein called Power of Compounding the 8th Wonder

of the World
 It is the Time spent in the market and not timing the market
that creates Wealth
 Invest regularly
 Discipline and Regularity are the keys to successful investing,

especially in growth investments.
 Hype, excitement and indiscipline are the worst enemies of
successful investing, especially in growth investments.

Principles of Building Wealth
 Asset Allocation is the highest form of Diversification
 Build a well diversified portfolio strongly weighted towards
equities in ones early years, then add shares of less volatile
fixed income assets as retirement age approaches
 “The only investors who shouldn’t diversify, are those who are
right one hundred per cent of the time.” - Sir John Templeton

Income v/s Wealth
 Income is the current stream of cash inflow from

service rendered, dividend received, rent received,
business income etc.
 Wealth is the income invested for growth in

investment vehicles as shares, bonds, real estate,
bullion

Wealth Creation Strategy
 Safety:
Safety of wealth is very important for wealth creation, an financial
planner must look for safety of investment Amount before deciding
on an investment avenue.
 Liquidity:
It significance how fast investment assets can be converted into
liquidity for any kind emergencies including retirement cash flow.
 Return:
It is necessary to beat inflation in order to create wealth

Retirement Planning Strategies
:Needs Analysis
The important points in retirement need analysis are:

 Retirement objectives
 Life expectancy
 Expected post retirement expenses & income
 Addressing risk (Investment during retirement phase)

Process of Retirement Planning
Needs Analysis:
Estimation of retirement expenses are based on

following two methods:
A. Income Replacement Method

B. Expense Replacement Method

Income Replacement Method
 Consider % of income earning during pre-retirement

phase in order to maintain the same standard of
living after retirement.
 Relevant to individual in the age group of 30 to 40

years.

Expense Replacement Method
 As individual gets closer to their retirement age, they

are in better position to determine the tentative
amount required to enjoy same standard of living
after retirement.
 Relevant to individual in the age group of 50+

Individual Life Cycle
 Pre working (Beginning): No worries for retirement
 Working (Consolidation): Start planning for retirement
 Nearing retirement (Transition): Start planning for retirement
 Post working (Retirement): Enjoy the fruits of your hard work

I.e. retirement planning

Retirement Corpus Calculation
This is a Three stage calculation.
 Stage 1.
Finding out Future value of expense / Income at Retirement,

i.e from Current Age to Retirement Age
 Stage 2.
Finding out the Present value of Expenses outflow during retirement.
i.e from Retirement age to Life expectancy.
 Stage 3.
Finding the amount of investment needed to create retirement
Corpus.
i.e from Current Age to Retirement Age

Case Study
Mr. Rahul, current age 35, is employed in a MNC company. Mr. Rahul
family include his wife (homemaker) and 3 years old son. The annual
expense of the family is Rs.2.00 Lakhs .He wish to retire at age 60
and want to enjoy same standard of living of today at retirement life
also. Mr.Rahul expect to live upto age 80.
Assumption:
1. Inflation rate to be 6% p.a though out his life.
2. Investment rate during retirement period is around 9% p.a
3. Investment rate during earning period is around 12% p.a
With the help of above data calculate the following:
A. Future value of expense at retirement age.
B. Retirement corpus required (Start of the year) and
C. Regular investment to be done on yearly basis (Start of the year)
during earning phase.

Solution of the case study
Using Calculator – CMPD Mode

Stage 1:
Finding out Future value of Expense.
 Calculator Inputs- CMPD  Data Inputs
Set: BEGIN / END Set: BEGIN

Nper: Nper: 60 – 35
Retirement age – Current age I=6
I = Inflation rate only PV = -200,000
PV = - Today Expenses PMT = 0
PMT = 0 FV = 858,374
FV = Solve P/Y = 1
P/Y =1 C/Y = 1
C/Y = 1

Stage 2:
Finding out PV of Retirement Cash flow series
 Calculator Inputs  Data Inputs
Set = BEGIN Set = BEGIN

(By default OR as per question)
Nper = (80-60)*1
Nper = (Life expectancy –
Retirement age) * P/Y I = ((1.09) / (1.06))-1)*100
I = Inflation adjusted rate of return
((1+R) / (1+I))-1)*100 PV =1,33,40,430
R= Investment rate during PMT = -858,374
retirement period
I= Inflation rate P/Y = 1
PV= Solve
C/Y = 1
PMT = FV of Stage 1
P/Y = 1 or as per cash flow mode
C/Y = 1 (This indicate Annual
Compound)

Stage 3:
Finding Out Regular Investment During Earning Phase
 Calculator Inputs  Data Inputs
Set: BEGIN
(By default OR as per question) Set : BEGIN
Nper = (Retirement Age – Current Nper : (60 – 35)*1
Age)* P/Y
I = Investment rate during earning I = 12
period.
PV = Solve (If Lump sum amount PV = 0
is required)
PMT = Solve (If regular PMT = 89,332
investment is required)
FV = 1,33,40,430
FV = PV of stage 2
P/Y = 1 or As per investment P/Y = 1
mode
C/Y = 1 (This indicate Annual C/Y = 1
Compound)

Lecture 2 and 3
 Revision of Lecture 1 (Topics)

 Basic of Retirement Module
 3 Stage calculation
 Solving Retirement planning numerical Sheet

Lecture 4 and 5
 Retirement Benefit Plan Types & Details

 Defined Benefit plans
 Defined Contribution plans
 Hybrid plans
 Other plans

Defined Benefits Plan
 What is Defined benefit plan

 Advantages of DB
 Disadvantages of DB
 DB plans in India
 Gratuity
 Leave Salary
 Retrenchment Compensation
 Voluntary Retirement Scheme

 Defined benefit plan
 Defined benefit plan promises to provide a benefit that is defined
and is generally based on an employee’s salary and years of
service
 The employees accrued benefit is determined by the plan’s benefit
formula
 Also called traditional retirement benefit plans, operating since a
long time, formulated for providing income streams to workers
based on loyalty with the company

 Advantages of Defined Benefit plans
 Offers defined & guaranteed retirement income security for
employees
 No investment risk, since benefits are defined
 Inflation taken into account since it is based on last drawn salary
 Benefit payable is liability of employer, so employer does not need
to save
 Tax deferred retirement savings medium
 Disadvantages of DB
 Difficult to understand by participant, as the benefit is formula
based
 Not beneficial to employees who leave before retirement

DB plans in India (refer to notes)

 Gratuity
 Leave Salary
 Retrenchment Compensation
 Voluntary Retirement Scheme

Gratuity
 Gratuity is nothing but a “Reward” in lieu of Loyalty which is

given by “Employer” to its “Employee”.
 Later it was made as an ACT – Payment of Gratuity Act
1972.
 It is a statutory benefit paid to the employees who have
rendered continuous service for at least Five Years
 The gratuity benefit is payable on cessation of employment
either by resignation, death, retirement or termination.
 Once an entity is covered by the Act, it will remain covered
even if the no of employees falls below the 10.

The payment of Gratuity act 1972
 The Act extends to whole of India except for the plantations

and ports workers in the state of Jammu & Kashmir.
 It is applicable to every factory, mine, oilfields, plantations,
port companies and railway.
 Every shop or establishment in which 10 or more people are
employed or were employed any day.
 Any establishments as notified by the central government to
be covered under the Act, employing 10 or more
employees.
 Once an entity is covered by the Act, it will remain covered
even if the no of employees falls below the 10.
 Employee has to continue service for not less than 5 years.

Tax treatment of Gratuity
 Exemption of Gratuity u/s 10(10).
Government Employee Covered Under the Not Covered under
payment of Gratuity payment of Gratuity
Act Act
Least of the Following Exempt: Least of the Following Exempt:
Actual Amount Received Actual Amount Received

Fully Exempt Rs. 10,00,000 (wef – 24th May Rs. 10,00,000 (wef – 24th May
2010) 2010)
15/26 * last months Salary * 1/2 * Average Salary of last 10
Completed years of Service or months * Completed years of
part thereof exceeding six Service
months.

Tax treatment of Gratuity
Covered Under the payment of Not Covered under payment of

Gratuity Act Gratuity Act
Meaning of Salary Meaning of Salary

Basic salary + DA Basic Salary + DA to the extent the terms of
Last Drawn Salary employment so Provide, + Commission if Fixed
No. of Days to be Taken as 26 Percentage of Turnover
Average Salary of last 10 months
Only completed yea of Service is to be Taken

Important Points
 Where gratuity is received in any year

from a former employer and again
received from another employer in a
later year, the limit of Rs.10 Lakhs will
be reduced by the amount of gratuity
exempt earlier.

Defined Contribution Plan
 What is Defined contribution plan

 Advantages of DC
 Disadvantages of DC
 DC plans in India
 Employees Provident Fund (EPF)
 Employees Deposit Linked Scheme (EDLI)
 Public Provident Fund

 Defined Contribution plan
 In DC plans employees have individual accounts to which the
employer and employees or both make periodic contributions.
 Final benefit amount is based on performance of the fund
(balance of employees individual account), unlike in DB plan
where benefit is defined and not based on investment
performance
 Benefit includes sum of employees and employers contribution,
investment returns (gains or losses), dividends, and capital gains
attributable to those contributions (after subtracting
administrative charges)

 Advantages of DC plans
 Participants have certain degree of flexibility on how they choose
to save
 Can be funded through payroll deductions directly
 Participants can benefit from good results
 Easily understood by participants
 Tax deferred retirement savings medium
 Disadvantages of DC
 Difficult to build a fund for those, who enter late
 Participants bear investment risk

 DC plans in India
 Provident Fund
 Statutory Provident Fund

 Recognized Provident Fund
 Employees Provident Fund (EPF), 1952
 Unrecognized Provident Fund
 Contributory Provident Fund
 Public Provident Fund
 Employees Deposit Linked Scheme (EDLI)

Hybrid DC + DB plan
 What is Hybrid plan
 Hybrid plans combine certain features of defined
benefit and defined contribution plans.

 I.e. a hybrid plan may provide benefits base don a
formula like a defined benefit plan, but pension

benefits are expressed as an account balance like a
defined contribution plan OR
 A hybrid plan may be defined contribution plan in
which contributions are based on a definite benefit
formula. E.g. Employees Pension Scheme

Hybrid plan
 Hybrid plan in India

 Employee Pension Scheme (EPS)
 Other Plans
 New Pension Scheme

Lecture 6
Investment Product :
 Public Provident Fund Scheme
 Reverse Mortgage
 National Pension Scheme
Doubts Solving and discussion on Examination.

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Retirement Planning

Website- www.fpa.edu.in | e-mail- fpa@fpa.edu.in 1

 FPA Retirement Planning & Employee Benefits

Website- www.fpa.edu.in | e-mail- fpa@fpa.edu.in 2

 To Understand the Scope and Significance of

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 Retirement Benefit Scheme : (Individual Employed in

 Defined Contribution Plan

 Other Related Topics

Website- www.fpa.edu.in | e-mail- fpa@fpa.edu.in 4

 What is Retirement Planning?

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How much does the client have today?

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 Time value of money

 Sir Albert Einstein called Power of Compounding the 8th Wonder

 Discipline and Regularity are the keys to successful investing,

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 Income is the current stream of cash inflow from

 Wealth is the income invested for growth in

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The important points in retirement need analysis are:

 Expected post retirement expenses & income

 Addressing risk (Investment during retirement phase)

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Estimation of retirement expenses are based on

A. Income Replacement Method

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 Consider % of income earning during pre-retirement

 Relevant to individual in the age group of 30 to 40

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 As individual gets closer to their retirement age, they

 Relevant to individual in the age group of 50+

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 Pre working (Beginning): No worries for retirement

 Working (Consolidation): Start planning for retirement

 Nearing retirement (Transition): Start planning for retirement

 Post working (Retirement): Enjoy the fruits of your hard work

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Finding out Future value of expense / Income at Retirement,

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Set: BEGIN / END Set: BEGIN

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Set = BEGIN Set = BEGIN

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 Revision of Lecture 1 (Topics)

 Solving Retirement planning numerical Sheet

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 Retirement Benefit Plan Types & Details

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 What is Defined benefit plan

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