Terms Beginning With 'r'

Retirement Planning

  • November 12, 2020
  • Team Kalkine

What is retirement planning?

Retirement planning is a process of setting up retirement income goals. A retirement plan is an essential requirement for people seeking independent retirement years. The scope of retirement planning is not only limited to planning goals but also achieving goals. 

It involves analysing financial objectives, existing financial situation, and estimating future cash flows to incorporate a comprehensive retirement plan. Retirement planning reduces the risk of outliving savings. 

When savings are exhausted, retirees are not able to maintain a similar lifestyle. Retirement planning also enables planning a course of action in the event of unforeseen events like death, disability etc. 

It essentially refers to the formulation and implementation of strategies pertaining to investments, savings, and allocation of money. A comprehensive analysis of the person is undertaken that not only includes assets and savings but liabilities, future expenses and life expectancy. 

What are the steps in retirement planning?

Identifying financial and retirement goals

The first step is to enumerate financial and retirement goals. In this step, the retirement planner charts out the ambitions of the person. This step entails the kind of lifestyle a person envisages to lead in retirement. 

Retirement planners try to list out all possible retirement goals, including retirement home, holiday planning, marriage planning, retirement time, family planning etc. The motive of this step is to form a base for retirement needs. 

Based on the goals extracted in the first step, the planners formulate an appropriate strategy for the person. A successful retirement plan is formed based on goals listed in the first step. 

Analysing the current financial situation

Financial health is as important as the physical health of a person. Retirement planners seek to test the financial health of the person. They analyse the cash inflows and outflows of the person to estimate the buffer funds.

This step also includes analysing the assets held with the person as well as liabilities. Overall commitments are analysed to assess the existing financial situation of the person. Retirement planners also consider insurance policies taken by the person. 

They also analyse the savings, or any investments undertaken by the person. A detailed analysis is carried to unveil the risks and opportunities with the existing financial situation of the person. 

Risk assessment 

Risk assessment is necessary to plan for the unforeseen events. In this step, the planner also evaluates the risk-taking capacity of the individual. In retirement planning, the age factor plays a crucial role in assessing risk-taking ability. 

A person seeking retirement planning in the 40s may not have similar risk-taking capacity compared to a person in 20s. The risk factor usually dictates the asset allocation and investment allocation strategy for the individual. 

Further, the liabilities of the person are also evaluated extensively to provide potential cover for any expected risks. Retirement planners usually recommend having an emergency fund to cover any risk arising out of unforeseen events. 

Asset allocation

Asset allocation holds a significant position in the process of retirement planning. It essentially refers to allocating funds to several asset classes to generate an adequate corpus for the retirement life. Money is simply an asset that could be applied to create wealth. 

An individual is offered with a range of asset classes in the investment world, spanning from shares, to ETFs to bonds. The asset classes also include real estate, precious metals, fixed deposits, annuities etc. 

Asset allocation framework is crucial to achieving prudence and flexibility. It allows generating risk-adjusted returns based on the risk-taking capacity of the individual. A sensible asset allocation framework is the key to achieve desired retirement goals.   

Periodic monitoring and rebalancing 

A retirement plan may get disrupted by the changes in the underlying conditions of an economy. Likewise, the plan is also equally sensitive to be disrupted by the potential changes in the financial health of the individual. 

In the event of a disruption to a plan or financial situation, rebalancing comes to rescue. Individuals also monitor their retirement plan consistently. It is essential to maintain alignment with the goals, and any deviation from the plan should be altered effectively. 

Why is retirement planning important?

In the simplest form, it is essentially the process of ensuring that when a regular income source is about to get constrained, one has sufficient wealth and income sources to support a desirable lifestyle. 

Each person has ambitions, and retirement is perhaps the best time to fulfil those ambitions since working age limits the ability to spend time on ambitions. However, in the absence of a retirement plan, one may have accumulated sufficient funds to live the lifestyle.  

Inflation eats out a lot of earning powers as purchasing power at the same amount of money depletes as inflation rises. Over a long term period, the power of compounding can effectively beat the inflation factor in wealth creation. 

Retirement plan allows an individual to be self-sufficient in the later years of life when most of the loved ones are far away. It enables elderly people to be confident and self-dependent during their old age. 

What is a Baby Boomer?  According to Merriam Webster - Baby Boomer is a person born during a period in which there is a marked rise in a population's birthrate. This term is used primarily for a person born in the United States following the end of the Second World War and in the years from 1946 to 1964. Though this is the literal meaning, in general terms, this word is used to describe the older section of our society.   What is the story behind the baby boomer term?  Most nations' economies and industries were destroyed after the World War 2, and only the US was thriving. The country turned its war production into consumer products to meet the world demand, and it had no such competition from other countries. It led to the fastest growing economic prosperity for the nation and created the highest standard of living in any country ever witnessed in such a short span of time. From the automobile to telecommunication to atomic energy, most of the industries in the US were booming along with its population. Hence the children born during this time are called boomers.  Generational cohorts are defined mainly by birth year, not current age, there are other cohorts such as Generation X, Generation Y or Millennials, and Generation Z. The term "Millennial" has become popular, and Generation Z is the youngest people on the planet right now.  Also read: Millennials on Crowd Media's Radar, Tapping into Influencer Market Space  The baby boomer generation is the progeny of the Silent Generations and precede Generation X. They are also known as parent of the Millennials. The silent generations grew up with the hardship of the Great Depression and won World War 2. On the other hand, baby boomers had everything handed to them in the era of newfound prosperity.  The first use of the word baby boomer is from January 1963. The Daily Press newspaper article described an increase of college enrollments as the oldest boomers coming of age. In the Oxford English Dictionary, the term dates to a January 23, 1970 article published in the newspaper The Washington Post. This new generation of the Post War era were the inhabitants of the modern world, which concluded the war following it countries around the world came together to lay the foundation of the Universal Declaration of Human Rights. Its purpose is to provide equal human rights and also value and protect all lives regardless of faith, colour, and gender.  Also read: Retirement, Baby Boomer Generation and Australia's Tax Scenario When were the baby boomers born?  In most of the Western countries, the baby boomers are referred to those born immediately after the end of World War II with the rise of the birth rate that came with it. Interestingly in Australia, the birth rate was on the rise, even during WWII. In Europe, birth rates started rising from the mid-1930s, and it saw a post-war baby boom which lasted till the late 1960s. In China, the baby boom cohort is the largest in the world. For Korea, the baby boom happened after the Korean War. Its government then encouraged people to have two children.   In the US, baby boomers are as much as 20% of the entire American population. The population played a substantial role in shaping American culture at large. Currently, most boomers are at retirement age, a matter of great concern as to how the country will deal with the ageing population. Why is the baby boomer’s generation so significant?  The generation before baby boomers faced a lot of difficulty in the US. They saw the Great Depression; during the war, they endured food shortages etc. When it was all over this generation could finally afford to have a lot of children. The post-war era also saw a wave of unprecedented economic prosperity. With it came the optimism for a better life. The spike in birth rate elevated American fertility rate hike, and it continued for another 18 years.  With the growth of these boomers from babies to children to adults to now seniors, the US reshaped itself. Different industries saw unprecedented growth, manufactures and advertisers targeted this new generation in the new prosperous world. Baby boomers dominated the popular culture in the 1950s and 1960s. They led the social change, which changed the basic fabric of the country. Be it the Civil Rights Movements or protest against the Vietnam War, the boomers were the forefront of it. They also gave a platform to the feminist movement. Their concerns and life experiences show a significant influence on American culture.   How do baby boomers want to plan their life ahead of retirement?  We need to understand the baby boomers are the generation of first men to walk on the moon, and they are the generation which promoted civil rights and encouraged an end to the Vietnam War. They also were high spirited and wanted to change the world to be a better place, but they also witnessed assassinations of iconic figures like Robert Kennedy, Martin Luther King. Depression-era parents raised them. Most importantly, they saw the rise of technology.  Children of Baby boomers have seen a massive change in technology across. A quick read through How has Trading Changed for Millennials? Technology Taking Charge in Shaping Trading Habits, will help to update on how stock trading changed for them.   Now that the baby boomers are at the retirement age or already retired, study suggests most of them plan on fulfilling their bucket list items like travelling or living in the countryside on a farm. The Greatest or the Silent Generation had very few investment options, typically in bonds or certificates of deposit. But baby boomers have a varied range of options to grow their hard-earned money and also enjoy its rewards. Industry experts suggest that the baby boomers may choose not to retire early. It could mean postponing retirement, or consulting or getting a part time job. Another important aspect is healthcare. Many baby boomers are in their last 60s and early 70s, it's never too late to work on the healthcare plan.  Also read: Five Smart Investment Tips for Millennials

Fund Flow helps to assess the changes in the working capital, and it is based on the accrual accounting system. Further, it is useful for long term financial planning of the business.

The retirement plan where investment income accumulates tax-deferred is referred to as a qualified retirement plan. Recognized by the US Internal Revenue Code, it meets the requirements laid out in Section 401(a) of the IRS (Internal Revenue Service).

An investment, which is bought with pre-tax income, generally by means of a contribution to a retirement plan, is termed as qualifying investment. Such investment is not subject to tax until an individual withdraws it.

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