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Retirement Planning



  By Prof Sameer Lakhani
The necessities and desires in life do not cease with retirement and there will have to be a form of
substitution for his current income which may allow an individual to maintain his similar standard of living.
The planning which goes into substitution of this income constitutes the core of retirement planning.

Factors to be considered such as current age, retirement age, life expectancy, investment horizon, number
of dependants, the dependency period, risk profile of the person, how much money will he require to cover
his (and his family’s) monthly expenses - areas of personal interest, medical costs, etc.

Retirement needs will have to be assessed correctly. While a short estimation will lead to the person
outliving his retirement corpus – which can be rather scary, a high estimation creates cash flow problems to
the person during the accumulation phase. So a right balance has to be achieved.

The process of approximating one’s retirement needs can be done in 2 ways –

a) Expense Protection Method: Under this method, monthly/annual expenses of the person (just before
retirement) are estimated. The figure so arrived at is adjusted for inflation rate and the concluding amount
indicates the corpus required by the person upon retirement which should be able to generate regular income
equal to the expenses so arrived at.

b) Income Replacement Method : Here, instead of estimating retirement needs based on an individual’s
numerous and limitless expenses, his ‘income just before retirement’ is considered. It works on the premise
that a certain percentage of the ‘income just before retirement’ will be sufficient for rest of the person’s
retired life.
1) Food & Clothing
2) Housing –
a) Rent;
b) Property tax, property maintenance & repairs;
c) Home Insurance;
3) Utilities –
a) Gas;
b) Electricity;
c) Water;
d) Telephone & Mobile;
e) TV bills
4) Transport
5) Insurance premium –
a) Medical,
b) Personal Accident
c) Motor
6) Income Tax
7) Liabilities –
a) Personal loans;
b) Vehicle loans;
c) Credit card payments
8) Recreation –
a) Travel;
b) Dining out;
c) Hobbies
9) Miscellaneous expenses
1.Savings and retirement proceeds from investments;
2. Pension annuity from employer and/or insurer/mutual fund;
3. Post retirement job to supplement income e.g. Teaching, part time consultancy etc
4. Reverse Mortgage
5. Regular income from investments in form of Dividend and Interest income
6. Other sources

While calculating the retirement needs estimation one should necessarily factor inflation in the working of
expenses.E.g if you’re planning to live on Rs 60,000 a month during retirement, a 6% inflation rate means
that in 10 years you would actually need Rs 107,451 a month, and in 20 years you’d need Rs 192,428 a
month to cover the same expenses.

In order to maintain a person’s same standard of living, the return on an investment must beat or at least keep
pace with the prevalent inflation rate.

Sources of Retirement funds:
Gratuity: Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the
employer to the employee upon leaving his job.

An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a
group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided
by the insurer. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.
Provident Fund: For a long time, provident fund has been the primary investment vehicle for saving for an
individual’s retirement nest until the entry of mutual funds and other new innovative products such as ULIP
(Unit Linked Insurance Policy), ULPP (Unit Linked Pension Policy) etc.

Provident fund can be considered as a debt instrument as majority of the corpus is invested in debt.
                                             How it works?

              A fixed sum (%) is deducted                     Employer also contributes his
              from employee’s salary as                       share to the Provident Fund
              contribution                                    (except Public Provident
              to Provident Fund                               Fund)

                                  The pooled sum is invested in
                                  various instruments, majority in debt

              On maturity – Employee gets his contribution + Employer’s contribution
              and interest accrued thereon on maturity and/or before maturity (due to pre-
              mature withdrawal, death of the deposit holder etc.)

              On death of the deposit holder before maturity – In case of death of the
              deposit holder/employee, the sum so accumulated is paid to the legal heirs.
                       TYPES OF PROVIDENT FUND
ITEM      STATUTORY               RECOGNIZED                    UNRECOGNIZED          PUBLIC
          PROVIDENT               PROVIDENT                     PROVIDENT             PROVIDENT
          FUND (SPF)              FUND (RPF)                    FUND                  FUND (PPF)
What is   It is a provident       A PF recognized by the        A PF not recognized   A PF covered
it?       fund (PF) set           Commissioner                  by the                under the PPF Act,
          up under the            of Income Tax.                Commissioner          1968.
          provisions of the                                     of Income Tax.
          Provident Fund          The Employees’ PF (EPF)
          Act, 1925. It is        & Miscellaneous
          maintained by           Provisions Act, 1952 apply
          the Central, state      for RPF.
          governments and
          their establishments.

It        All employees           It automatically covers any         NA              All individuals
covers    of Central, State       Establishment that employs                          (whether salaried,
whom?     governments             > 20 persons.                                       self-employed,
          and government                                                              employed or not)
          establishments.         Establishments with < 20                            and minors
                                  employees are free/                                 (through
                                  encouraged to join RPF                              individuals acting
                                                                                      as their guardians).
                      TYPES OF PROVIDENT FUND
ITEM           STATUTORY              RECOGNIZED               UNRECOGNIZED           PUBLIC
               PROVIDENT              PROVIDENT                PROVIDENT              PROVIDENT
               FUND (SPF)             FUND (RPF)               FUND                   FUND (PPF)
Employee’s     Eligible for           Eligible for deduction   Not eligible for       Eligible for
contribution   deduction under Sec    under Sec 80C of         deduction under        deduction
               80C of Income Tax      Income Tax (IT) Act,     Sec 80C of Income      under Sec 80C
               (IT)                   1961                     Tax (IT) Act, 1961.    of Income Tax (IT)
               Act, 1961                                       In other words, no     Act, 1961
                                                               tax exemption for

Employers      FULLY TAX              < 12 % of salary –       TAXABLE AT             NA- as there is
Contribution   EXEMPT FOR             is tax exempt for        MATURITY –             no employer
               EMPLOYEE –             employee.                Not treated as         contribution
               Not treated as                                  income in the hands    in PPF.
               income in the hands    >12 % of salary –        of employee in the
               of employee in the     taxable for employee     year in which
               year in which                                   contribution is made
               contribution is made                            by employer.
               by employer.                                    Taxable on maturity.
                 TYPES OF PROVIDENT FUND
ITEM       STATUTORY           RECOGNIZED        UNRECOGNIZED                   PUBLIC
           PROVIDENT           PROVIDENT         PROVIDENT                      PROVIDENT
           FUND (SPF)          FUND (RPF)        FUND                           FUND (PPF)
Interest   FULLY TAX           <9.5% p.a. - is   TAXABLE AT                     FULLY TAX
Earned     EXEMPT FOR          tax exempt for    MATURITY -                     EXEMPT
           EMPLOYEE – Not      employee.         Not treated as income in the
           treated as income                     hands of employee in the
           in the hands of     >9.5% p.a. -      year of credit.
           employee in the     taxable
           year of credit.     for employee.

Maturity   FULLY TAX           FULLY TAX         Employee’s contribution –      FULLY TAX
Proceeds   EXEMPT FOR          EXEMPT FOR        i) Maturity amount – FULLY     EXEMPT
           EMPLOYEE            EMPLOYEE          TAX EXEMPT;
                                                 ii) Interest earned –
                                                 TAXABLE AS ‘Income from
                                                 Other Sources’.
                                                 Employer’s contribution
                                                 i) Maturity amount –
                                                 TAXABLE AS ‘Salaries’
                                                 ii) Interest earned –
                                                 TAXABLE AS ‘Profits In
                                                 Lieu Of Salary’.
Public Provident Fund (PPF):

Eligibility – Individuals & Individuals on behalf of their minor.

Minimum Investments Rs 500 per annum in multiples of Rs 5 and maximum Rs 1,00,000 per annum.

Duration of 15 years, can be extended for one or more blocks of 5 years. Account can be discontinued but
repayment of subscription along with interest will happen only after 15 years.

Suitable for risk averse investors, self employed professionals, and those not covered by the EPF.

Income is tax free.

This Option has become even more attractive after the interest rate was benchmarked to the 10-year
government bond yield. This year, the PPF will earn 8.6%, 25 basis points above the average benchmark
yield in the previous fiscal. The rate will be determined by the yields of gilt securities in the secondary
market. This will ensure that the PPF returns are in line with the prevailing market rates.

Liquidity – Moderate -You can make partial withdrawals from the sixth year onwards . But Loans are now
costlier at 2% compared to 1% earlier.

You must invest at least Rs500 in the PPF during a financial year or pay a penalty
Employee Provident Fund (EPF):

In any organization where 20 or more employees work at any time, is covered under the Employees
Provident Fund Act ,1952.

A stipulated sum ( 12% of Basic Wages + Dearness Allowances) is deducted from the salary of the
employee as contribution towards the fund. The employer makes a matching contribution. The amount thus
contributed is invested in government securities. the fund is managed by a board of trustees under the PF Act.

The rate of Interest is fixed by the central government in consultation with the Central Board of Trustees
every year during March / April. Presently it is 8.5% per year.

Monthly contribution to the EPF is eligible for tax deduction under Section 80C.

If a subscriber is diligent, even if he gets a modest basic salary of Rs 25,000 at 25 years , and a 10% raise
every year, his EPF will make him a crorepati by the time he retires, So, don’t give in to the temptation of
withdrawing your PF while changing jobs. If you do this within five years of joining, not only will the
withdrawn amount be taxed , even the tax benefits availed of in the previous years will be reversed

Income is tax free.

Liquidity is very low - You get the money only on retirement. A one-time withdrawal is allowed for certain
pressing needs , such as buying or building a house, or a child marriage. Suitable for - all employees in the
organized sector.
National Savings Certificate (NSC) :

Certificates are available in the denominations of Rs 1oo/-, RS 500/-, Rs 1,000/ , Rs 5,000/- and Rs
10,000.There is no maximum limit on the purchase of the certificates.

Historically -Period of maturity of a certificate is six years. Certificate of Rs 100 denomination will have a
maturity value of Rs 160.10.

Interest accrued on the certificates every year is liable to income tax but deemed to have been reinvested.
Income tax rebate is available on the amount invested and interest accruing under section 80 C.

Sale to NRIs, Trusts, HUFs and AOPs is not allowed.

Like the PPF, the interest on NSCs has also been Linked to the government bond yield in the secondary
market. The tenure has also been shortened by a year to five years. The new 5-year NSC will offer an interest
rate that is 25 basis points above the 5-year bond yield.

The government has also introduced a 10-year NSC, which will carry a coupon rate of 50 basis points
above the 10-year bond yield.

Income is fully taxable at normal rate. Suitable for Risk-averse investors looking for short-term options ,
senior citizens and those in low tax bracket.

Liquidity – Moderate - You can’t withdraw before five years.
Bank Fixed deposits:

Before opening a FD one should check the rates of interest for different banks for different period.

It is advisable to keep the amount in three to five small deposits instead of making one big deposits.

Suitable for the taxpayers who shy from market risk, five - year FDs are the only remaining true fixed
income tax-saving instrument. Even long-time favorites, such as the PPF and NSCs, have become market-
linked. Even if the 5-year benchmark bond yield moves up to 9%, NSCs will offer an interest rate of 9.25%.
Banks are already offering higher rates of 9-9.5%.

Senior Citizen Saving Scheme:

For senior citizens, the Senior Citizens’ Savings Scheme has become a little attractive. It will offer an
interest rate of 100 basis points above the 5-year government bond yield. But again, tax-saving FD appear a
better bet because banks offer senior citizens a 25-50 basis points higher rate of interest.

 Suitable for Retirees looking for a regular stream of income.NRI and HUF are not eligible to open this

Liquidity – High - Interest paid out quarterly and premature withdrawals allowed before five years with

Interest is 9% p.a. Income is fully taxable at normal rate.Rs 15 lakh is the maximum limit per individual.
Equity Linked Saving Scheme: (ELSS) :

Tax free dividends, no tax on income, shortest lock in period , flexibility of investments and potential to
give high return. All this makes ELSS funds possibly the best way to save tax.

However , it may be the worst way to avail of your Section 80C limit if you tend to be reckless with
investments and if notional losses give you sleepless nights . ELSS funds carry the same risk as an equity
fund, so the SIP route is the best way to go about it.

Liquidity is high – Shortest lock in period of three years .Suitable for Investors willing to take a calculated

              Fund Name                      3 years returns (%)       Value of Rs 10,000 invested on
              Fidelity Tax Advantage                  25.39                          19,715
              Taurus Tax shield                       23.48                          18,827
              Canara Robecco                          27.42                          20,688
              Franklin Tax shield                     24.99                          19,527
              ICICI Pru Tax Plan                      28.53                          21,233
              Religare Tax Plan                       23.46                          18,818
Unit Linked Insurance Plans: (ULIP):

Linked to market ,Income is tax free. Suitable for Savvy Investors who understand Switching facility as
well as understand the various funds in which the Ulips can invest.

Buy a Ulip only if you can continue the plan for at Least 12-15 years. Before that , the plan may not be able
to recover the charges levied in the first few years. Ulip plan can be an effective asset allocation tool.

Make sure your insurance plan is DTC-compliant. The DTC says that to claim tax deduction and tax
exemption on maturity, an insurance plan must offer a cover of 10 times the annual premium, Buy a plan only
if it meets this criterion.

E.G Returns of the Ulip funds of HDFC Life as on 30 November 2011. The returns are annualized.
Post office Small Saving Scheme:

Only for resident Individual.
Post Office Saving bank account. – Minimum balance of Rs 250. Ceiling on a single holding is Rs 1,00,000
and joint holding is Rs 2,00,000 .
Post office Time Deposits – Interest rates, compounded quarterly but paid annually or at maturity. No
premature closure is allowed before 6 months. No interest is paid on accounts closed before expiry of one
Post office Monthly income Scheme – Premature withdrawals are allowed after expiry of one year. Penalty
at 2% of the deposit amount if withdrawals are affected on or before expiry of 3 years and 1% thereafter.
Maximum limit on single account is Rs 4.5 lakhs and on joint account is Rs 9 lakhs.

                                   Instrument                    Interest Rates
                     Saving Deposit Account                           4%
                     1 Year Term Deposit (T.D.)                      7.70 %
                     2 Year Term Deposit (T.D.)                      7.80 %
                     3 Year Term Deposit (T.D.)                      8.00 %
                     5 Year Term Deposit (T.D.)                      8.30 %
                     5 Year Recurring Deposit (R.D.)                 8.00 %
                     5 Year Monthly Income Scheme(M.I.S)             8.20 %
Life Insurance policies:

Returns are about 6 to 7 % a year. Income is tax free. Suitable for risk averse investors who don’t mind low
returns. Liquidity – low – you get money only on maturity.

Traditional traditional life insurance policies are perhaps the worst way to save tax. The buyer pays a heavy
price by getting returns that cannot match inflation and get an insurance cover that is too small to be of any

Don’t buy an insurance policy only to get tax deduction and tax free income. A P PF account wilt serve this
purpose better.

Pension plan: Income is fully taxable at normal rate. Returns are linked to market. Liquidity low – you must
buy an annuity after retirement.

Unit linked pension plans are sold by insurance companies. They offer greater transparency, flexibility and
control to the investor. Just like a Ulip, you can tweak the asset allocation in your pension plan depending on
your reading of the market and risk appetite.

New Pension Scheme, which also Invest in a mix of equity, debt, and money market Instruments. The
investors can choose any of the six fund houses to manage his investments. You can't buy from more than one
fund house, thus limiting the choices for the investors.

Pension plans are also being sold by mutual fund houses. The only thing that differentiates these plans from
regular funds is the stiff penalty impose on withdrawal before the investor turn 58 years of age.
Pension plan:

Before you invest in a pension plan remember that on maturity only 33% can be withdrawn and the rest
must compulsorily be used to buy an annuity. This annuity will pay the investor a monthly Income.

Infrastructure Bonds: Not applicable for current assessment year.

The new Section 80CCF gives you an additional tax deduction of Rs 20,000 invested in Long-term
infrastructure bonds.

An investment of Rs 20,000 will translate into tax savings of Rs 6180 for those in the highest 30% tax slab.

Return around 9 to 9.5% a year. Income is full taxable at normal rate. Liquidity is moderate – you can exit
after 5 years. Suitable for investors in 20% and 30% tax brackets.

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