What is financial planning?

Financial planning is the process of developing a personal roadmap for your financial
well being. The inputs to the financial planning process are:

1. your finances, i.e., your income, assets, and liabilities,

2. your goals, i.e., your current and future financial needs and
3. your appetite for risk.

The output of the financial planning process is a personal financial plan that tells you
how to use your money to achieve your goals, keeping in mind inflation, real returns, and
taxes. In short, financial planning is the process of systematically planning your finances
towards achieving your short-term and long-term life goals.
Life Goals
Most people nurture dreams of owning a bigger house or car, exploring the world, giving
their children the best possible education, a blissful retirement, etc. Basically, these
dreams are life goals. Consider this example:

Mr and Mrs Khanna, 35 and 32 respectively, have a three year old son. Both work in
private sector companies. Mr Khanna plans to retire when he’s 50. From their current one
bedroom rented suburban Mumbai apartment, the Khannas hope to move to their own
two bedroom apartment costing around Rs 25 lakh within the next five years. They own a
small car, for which they have availed of a loan. Mr Khanna reckons that he will need Rs
15 lakh for his son’s higher education 15 years later. He also wants to build a corpus of
Rs 75 lakh for his retirement.

While distinguishing short term goals from long term goals, you must keep in mind that,
as a general rule, any life goal that needs to be met within five years can be considered as
short term. Beyond that, any other goal can be classified as long term. By this
classification, the Khannas’ goals can be classified as follows:

Using a similar yardstick, you may classify your own life goals. Each of them needs
financing. How you plan your finances, to have the right amount at your disposal at the
right time, is what financial planning is about.
Importance of financial planning
Can you manage without financial planning? Many people do, but they may find—often
when it’s too late—that they don’t have the means to achieve their life goals.
For example, people today realize the importance of living life to the fullest.
Consequently, many opt for early retirement from full time jobs, as compared to a few
decades ago, when most people worked until the maximum retirement age of 58-60
years.

The average person can, today, expect to live a healthy life well into his or her seventies
or eighties, which means that retirement life is almost as long as working life.
Financially, it implies that savings (after taking into account inflation) should be enough,
not just to maintain the same lifestyle for almost 25-30 years, with no new income, but
also to take care of medical expenses, which are usually high the older a person gets.
Planning for all this is a tall order for anyone. That’s why it’s critical for everyone to plan
their finances from an early age.

So, what do you need to know about yourself when thinking about a Financial Plan?
Your financial plan entirely depends upon how much effort you are willing to put in. This
means not just having a good handle on the details of your income and expenses, assets
and liabilities, but more importantly on the following items:

1. Time Horizon and Goals

2. Risk Tolerance
3. Liquidity Needs
4. Inflation
5. Need for Growth or Income

No doubt there are other factors that are important as well, but we believe that the above
five require a more detailed study on your part.

Time Horizon and Goals: It is important to understand what your goals are, and over
what time period you want to achieve your goals. Some goals are short term goals those
that you want to achieve within the year. For such goals its important to be conservative
in one’s approach and not take on too much risk. For long term goals, however, one can
afford to take on more risk and use time to one’s advantage.

Risk Tolerance: Every individual should know what their capacity to take risk is. Some
investments can be more risky than others. These will not be suitable for someone of a
low risk profile, or for goals that require you to be conservative. Crucially, one’s risk
profile will change across life’s stages. As a young person with no dependants or
financial liabilities, one might be able to take on lots of risk. However, if this young
person gets married and has a child, he/she will have dependants and higher fiscal
responsibilities. His/her approach to risk and finances cannot be the same as it was when
he/she was single.
Liquidity Needs: When do you need the money to meet your goal and how quickly can
you access this money. If you invest in an asset to and expect to sell the asset to supply
you funds to meet a goal, then please understand how easily you can sell the asset.
Usually, money market and stock market related assets are easy to liquidate. On the other
hand, something like real estate might take you a long time to sell.

Inflation: Inflation is a fact of our economic life in India. The bottle of cold drink that
you buy today is almost double the price of what you paid for ten years ago. At inflation
or slightly above 4% per annum, a packet of biscuits that costs you Rs 20 today will cost
you Rs. 30 in ten years time. Just imagine what the cost of buying a car or buying a home
might be in ten years time! The purchasing power of your money is going down every
year. Therefore, the cost of achieving your goals need to be seen in what the inflated
price will be in the future.

Need for Growth or Income: As you make investments, think about whether you are
looking for capital appreciation or income. Not all investments satisfy both requirements.
Many people are buying apartments, but are not renting them out even after they take
possession. So, this asset is generating no income for them and they are probably
expecting only capital appreciation from this. A young person should usually consider
investing for capital appreciation to take advantage of their young age. An older person
however might be more interested in generating income for themselves.

Benefits of financial planning

1. Here’s a list of the benefits that a well chalked out financial plan can bring
about:
2. Helps monitor cash flows and reduces unnecessary expenditure.
3. Enables maintenance of an optimum balance between income and expenses.
4. Helps boost savings and create wealth.
5. Helps reduce tax liability.
6. Maximizes returns from investments.
7. Creates wealth and ensures better wealth management to achieve life goals.
8. Financially secures retirement life.
9. Reviews insurance needs and therefore also ensures that dependents are
financially secure in the unfortunate event of death or disability.
10. Lastly, it also ensures that a will is made.

Financial planning can help you achieve peace of mind since:

 **The financial planning process**

Hopefully, you’re now convinced that you definitely need a piece of the action. What
next? When you actually get right down to it, financial planning consists of a series of
steps. This section examines each of these steps in detail.

Step 1: Identify your current financial situation

Sit down with all the earning members of your family and gather all information about
your sources of income, debts, assets, liabilities, etc. This gives you a picture of your
current financial situation.

Step 2: Identify your goals

Ask each member to list what they think are current and future family goals. Prioritize
each goal by establishing consensus and put a time period against each, i.e., when will
you need the finances to achieve that goal. If possible, quantify each goal. This exercise
enables recognition of short term and long term goals, and how much money you need
for each.

Step 3: Identify financial gaps

Once you know where you stand financially, and where you want to be, i.e., how much
you have or can expect regular sources of income to generate, and how much you need to
fulfill various goals.
A simple calculation gives you an idea of the shortfall. This is important, because,
identifying the right investments to cover the shortfall depends on you quantifying the
income from your investments.

Step 4: Prepare your personal financial plan

Now review various investment options such as stocks, mutual funds, debt instruments
such as PPF, bonds, fixed deposits, gilt funds, etc. and identify which instrument(s) or a
combination thereof best suits your needs. The time frame for your investment must
correspond with the time period for your goals.

Step 5: Implement your financial plan

It’s now time to put things into action. Gather necessary documents, open necessary
bank, demat, trading accounts, liaise with brokers and get started.
Most importantly, start investing and stick to your plan.

Step 6: Periodically review your plan

Financial planning is not a one-time activity. A successful plan needs serious
commitment and periodical review (once in six months, or at a major event such as birth,
death, inheritance). You should be prepared to make minor or major revisions to your
current financial situation, goals and investment time frame based on a review of the
performance of your investments.

Financially challenged individuals who feel this is just beyond them, can of course
always consult professional financial planners, who takes one through the whole process.
Being a long term commitment, financial planning goes on until one meets his last goal.
It is also a personal decision, which implies that a person must select someone who he is
comfortable with, and can build a long term relationship that is mutually beneficial.

Tips for making the most of the financial planning process

1. Start now. Even if you are in your mid thirties or forties, it’s better to start now
than dawdle for another five years. Every day counts.
2. Be honest with yourself. Seek help when needed.
3. Set sensible, measurable goals for yourself. Be realistic in your expectations of the
results of financial planning.
4. Review your plan and financial situation periodically and adjust as needed.
5. Always review the performance of your investments; pull out if needed and
reinvest the money elsewhere.
6. Be hands-on. It’s your money and no one else will do your work for you.

Features of a good financial plan

How do you evaluate the quality and effectiveness of your financial plan? Well, here’s a
checklist you can use.

1. Does it indicate your current financial situation?

2. Does it list out all your goals in measurable terms?
3. If professional help is sought, your financial planner will ensure that your
financial plan also contains the following:
4. List of possible risks and a risk management plan.
5. Expected returns from each investment.
6. A mapping between the investments and goals, i.e., how each investment helps
you
7. Details of one time and recurring fees charged by him.

Checklist for Financial Planning

What is Financial Planning?

Financial Planning is a process that Reviews your current financial position, sets
goals for the future and creates a plan to achieve those goals

Reviewing your Finances

You should begin with a review of your current financial position. Start with a top down
approach.Do the following to ascertain your position


 Total assets + Total savings – Total debt = Your position
 Work it down further by doing a cash flow analysis
 Monthly income – Monthly expenses = Your cash flow
 Further analyse your expenditure in more detail
 Where are you spending money?
 Clothing, entertainment, eating out
 Identify opportunities to save money
 Eg: eating out lesser could save you Rs 1000 per month

Setting Goals
 Identify your goals
 Buying a new car, buying a house, taking a vacation, educating your children etc
 Understand the trade offs
 Lesser money in the short term for clothing, entertainment etc
 Set clear targets and time frames to achieve your goals
 Saving Rs 2000 per month will help educate your children
  Saving Rs 1000 per month will help fund your vacation

Creating A Financial Plan

 Include a mix of short and long term goals
 Convert your goals into rupee amount and set a deadline to achieve them
 Diversify your investments according to your risk profile
 Look for ways to minimize tax
 Don’t forget insurance
 Start retirement planning
 Get professional advise in required
 Don’t wait, implement your plan today

The building blocks of financial planning

Just like a building where you start with the foundation and then move upwards towards
the first floor, second floor and so on, the financial planning building has five blocks to
scale. The first two blocks are the foundations and then the next three levels where you
actually experience the benefits of a strong foundation. Let us have a look at these
blocks, what they are and how to go about their planning:

4. Retirement planning
3. Investment planning
2. Insurance planning
1. Contingency planning

One might be wondering why the reverse order? Just as mentioned we have to build the
foundation and then move upwards. The foundation starts with contingency planning
and then you gradually move up.

The first two blocks: contingency planning and insurance planning is known as risk
management. Also in a layman's term, it is the foundation of a good financial planning.
Once this is in place, you are not worried as it takes care of all your emergency
situations (contingency planning) as well as your insurance requirements (that is your
health insurance, life insurance and other insurance).

Once your risk is managed, you can then safely move on to the higher levels to plan for
your goals. The next two levels are investment planning and retirement planning
collectively known as goal planning.

Let us start with the foundation and the first of the two levels in risk management.
Contingency planning
Also known as emergency planning. It has been emphasised time and again that a
contingency plan or an emergency plan has to be in place before starting to plan for
other goals. Why? Emergencies can come anytime or anyplace especially when we least
expect it. We cannot predict it or even prevent it but what we can do is buffer ourselves
against it so that our life does not go for a toss due to the emergency. It is basically
saving for a rainy day. So once that you have planned for any untoward or unpredicted
eventualities, you can safely move ahead to the next level of the financial plan.

How to calculate?
All your mandatory monthly expenses which you have to meet by hook or by crook have
to be taken into account. A list of all mandatory expenses have been given below:

Fixed mandatory expenses (which are fixed every month) include:

 Mortgage installment
 Car loan installment
 Other loan installments
 Life insurance premium
 Health insurance premium

And variable mandatory expenses (which are mandatory but vary every month) include:

 Food
 Utilities
 Grocery
 Transportation
 Miscellaneous (unavoidable) expenses

The above expenses have to be calculated on a yearly basis and then divided by 12
months so as to arrive at an average monthly figure.

How much to set aside?

At least three months of your average monthly expenses have to be kept aside in the
form of emergency funds since it is generally observed that three months worth of funds
are enough to meet most emergencies and come back on track. People nearing
retirement should try and keep aside at least five to six months of mandatory monthly
expenses as contingency fund.

Let us take an example: Say your yearly mandatory expense is Rs 350,000.00. Hence
your monthly average expenses will come to Rs 29,167 (3,50,000/12) (rounded off).
You need to keep aside Rs 87,500 (29,167*3) that is your three months' average monthly
expenses as contingency funds to meet any eventualities.
It is not necessary to keep the entire amount in cash. You can keep aside Rs 20,000 in
cash and the balance you can split between savings account, fixed deposit, or liquid
funds. Why? Because all of the above mentioned products have liquidity, their biggest
advantage, which is a very important feature in case of any emergencies. Also,
remember that in case of usage of these funds always remember to replenish it.

Insurance planning
It is the planning for an adequate amount of insurance. And it definitely does not end
with life insurance alone. One needs to also plan for health insurance, disability
insurance, and property insurance. These insurances are very important and everyone
should try to incorporate them in their insurance planning. First and foremost, it is very
important to know one very important fact. Insurance is not investment and vice versa.
Never try to mix the two. Insurance is for risk management and investments are for goal
achievements. This golden rule should form the crux of your decision-making when
buying insurance polices. Never buy insurance just because someone advises you to buy.
Try and understand the product, correlate it with your needs and requirements and only
then go for it. So how much is adequate? A number of components go into the
calculations in finding the adequate amount of insurance.

These are:

 Your current age

 Inflation adjusted returns
 Number of dependent in the house
 One time cost (which includes any existing loans that you may have taken,
(exclude the home loan which is already insured against declining term
insurance) and any other expenses such as last rites expenditure)
 Your current cost of living (only include the fixed and variable mandatory
expenses. Exclude any mandatory expenses related to you since these expenses
will cease to exist after your demise)
 The amount needed to pay off responsibilities like your child's education and
marriage
 Exiting investments
 Any existing life insurance

All these factors help in finding the adequate amount of life insurance. Hence if you
have any existing insurance then you only need to buy the additional amount. NOTE: If
you are no more an earning member of the family, that is, if you have retired, then you
should not take any life insurance.

Health insurance
A must again with the increasing amount of stress that the younger generation is facing,
we would not be surprised if you have already started running huge amounts of medical
bills at a young age. A minimum amount of Rs 2 lakh is a must. If affordable increase
the amount. Also, if possible try to take individual policies as against family floater
plans.

This is because if you have a floater health policy worth Rs 3 lakh, and you fall sick and
use up an amount of say, Rs one lakh worth of health insurance, only Rs 2 lakhs will be
available for the rest of the year for you and your entire family.

In fact now individuals have an option to go for a top-up, that is, if you have an existing
policy with your employer or you have bought it one yourself then you can top it up to
Rs 10 lakh. The premium amount works much cheaper. For example, say you have Rs 5
lakh of health insurance (this is the maximum offered by most health insurers today) and
you would like to be insured for more than that then you could buy a top-up plan for
another Rs 5 lakh.

So if you have a medical bill of Rs 7 lakh then the first Rs 5 lakh are covered by your
existing policy and the balance Rs 2 lakh by the top-up policy. NOTE: It is very
important to pay your insurance premium on time and see that it does not lapse
especially for individuals who are nearing 60 as after this age very few insurance
companies offer health insurance and to get a new one is very difficult. Also, for people
who are working and have not taken any other mediclaim policy besides the one their
company offers them, remember that once you leave the job and find a new one, you
might no longer be covered by that policy.

Disability insurance
Again an important insurance policy, especially, for individuals who travel frequently.
Accidents can happen anytime and if it leads to any disability then well let's not even
think about it. This policy is not an expensive one though. There is also an option for
individuals to take this insurance as a rider along with their life insurance.

Compare the premium amounts of a standalone policy and the premium if it is taken as a
rider and then decide which one is better.

Investment planning
Why do we invest?
Of course to save money and earn returns! For what?

Your obvious answer would be: for my and my family's future. If asked to elaborate, I
am sure you will find it difficult to list down five things for which you are saving
money. But if the investments or the money you are saving is not invested in right
investment avenues then in the hour of crisis you either have invested in a locked-in
financial product or their value has become half or in a product which rates very low in
liquidity (like real estate). So the right type of investment product is very important to
help your money grow and in achieving your goals.

So this is where investment planning comes in place. Investments of your hard earned
money should always be done considering your goals and the time frame in which you
want to achieve your goals. The next question is how to go about it. First you need to
start with charting, that is, writing down your goals and the time frame in which you
would like to achieve them. This forms the base of your investments. To make the task
simpler, you can break down your goals into three different sections:

 Responsibilities: Providing for your dependent parents; funding for your

children's education and marriage; funding for marriage of your siblings, etc
 Needs: Buying a house, saving for retirement, buying office space and any other
needs you may have
 Dreams: Finally, your dreams or your aspirations which can range anywhere
from buying a solitaire for your wife to going on a world tour to buying a sports
car

We live only once and so no dream is too big or far-fetched. The next step is the time
frame in which you would like to achieve it. Let me explain the importance of this via
an example.

Let us say you want to save for a down payment for the dream car, which you are
planning to buy after a year and a half. You start saving by investing regularly in equity
mutual funds. After a year, just nearing the time frame you have set for yourself, you
decide to redeem the investment and the market crashes. Forget the profit, your initial
investments too has halved in value.

Equities are good investments but only when you have the time frame of more than
eight years. Then you can be rest assured that your investments will earn on an average
13 per cent to 15 per cent return.

Moral of the story:

Your investment products should be selected on the basis of the time frame within
which you would like to achieve the goal. It may be difficult to list down a time frame
but even an approximate figure will do.

Once your goals and time frame is in place you need to put a figure or an amount that
you would like to spend for that particular goal at today's value. Say for example, one of
your goals is to save for your child's higher education, which is 15 years from now. You
are willing to spend Rs 3 lakh in today's value. To this will be added inflation which in
layperson's terms means what you will get in today's date for Rs 100, you will have to
spend Rs 275 after 15 years taking into consideration an inflation rate of 7 per cent.

We cannot forget inflation as the amount, which we will derive after taking into
consideration inflation, is the amount you will have to spend. Also, keeping in mind this
amount you need to plan for it. So for the same goal, which will cost you Rs 3 lakh in
today's date, you will have to spend Rs 8,27,709 after 15 years taking into consideration
7 per cent inflation rate.

Beware of inflation!

Future value = Present Value * (1 + inflation rate) ^ Number of years left to achieve
your goals.

Hence, future value = 3,00,000 * (1 + 7 per cent) ^ 15

Therefore, future value = Rs 8,27,709 (approximately).
And that is the amount for which you need to plan.

An easy way to do this is to prepare a table, which will help you in listing your goals
along with a fixed time frame, priority, value and the future inflation adjusted cost. Have
a look at the table above (the table is hypothetical. The values mentioned here may
differ from individual to individual).

Note: If you are married, it is important that you involve your spouse when you list
down the goals as even your spouse may have her/his own goals, which they would like
to achieve. Also it has to be a joint effort so nothing is missed out.

The above process will help you to realise how much you need to save. The different
investment avenues available are:
Important investment avenues
Equity: You can safely invest in them (that is, direct equities or equity mutual fund) if
your time horizon is for more than 8 years. You can also invest in them if your time
horizon is more than 5 years but the exposure should be limited. Remember one thing,
though: even in the long term, that is, more than 8 years as you near the realisation of
your goal, you must systematically transfer your money from equity to debt. So this way
you not only protect your capital but also your profits.

Debt: If your time frame is five years, debt is for you. The return is less but you can be
sure that in products like fixed deposits, your capital will be safe.

Gold: At least 5 per cent of your portfolio has to be in gold. Gold is safe haven
especially when there is crisis in the world. But be very clear about one thing: jewellery
does not account for investments. Investments in gold have to be in the form of gold
coins or bars. Gold exchange traded funds (ETF) is also a good form of investments.

Real estate: Property has always been good a form of investment. The only problem is
the amount of investment required and the liquidity. Take for example in today's market
where real estate prices have gone down, it is a good buyers' market but for sellers in
dire need of cash, they will have to break the rates and sell at a discounted price.

A professional advice for selecting the right investment avenue is always advisable.

Retirement Planning :
The longest of journeys start with a single step. We are not sure who said that, but being
in the financial planning space, we think it most aptly describes what retirement
planning is all about. Planning for retirement is one long journey but a resolute and
systematic step-by-step approach makes it a lot less laborious.

1. Start early

A well-prepared approach towards any goal is usually the result of an early start.
Retirement planning is no different. We hear financial planners say that it’s never
too early to start saving for retirement, they are right. Make no mistake that an
early start helps and you will be surprised at just how much it helps. Your friend
or colleague who started saving for retirement even five years earlier than you
with the same quantum of investments is likely to save twice as much as you at
retirement. Even if you don’t have the requisite amount of money required to
start, the key lies in starting with what you have and making up for the deficit at a
later stage. However the opportunity to make an early start should not be
compromised with.
2. Seek the assistance of a financial planner

Planning for retirement can be fairly uncomplicated. You need to have a good
idea of where you want to be 30 years from now in financial terms and what kind
of a lifestyle you would like to maintain. However, putting the financial plan in
place (which has a lot to do with math, an unpopular subject with a lot of us at
school) can be quite complicated. This is where an investment advisor steps in.
He can give a concrete shape to your retirement plan by coming up with ‘the all-
important figure’, based on your inputs and chart out a plausible investment
strategy for the long term.

3. Implementing the plan

Having an investment plan in place sets the ball rolling for you and your
investment advisor. He will now implement the plan by making investments in
stocks, mutual funds, bonds, small savings schemes and fixed deposits among
other investment avenues. Your risk profile is the most important reference point
for the investment plan. The objective is to invest in avenues that lower risk and
maximise returns and do so in line with your risk profile. Asset allocation i.e.
investing across assets in varying degrees will play a vital role over the long run.
This is where the investment advisor’s expert advice will play a crucial role.
Typically a retirement portfolio should be well-diversified across pension plans,
mutual funds, equities, EPF/PPF and fixed deposits.

4. Tracking/reviewing the plan

Your investment plan must be monitored regularly to make sure that you are on
course to meeting your objectives over different market cycles without
compromising on the risk. Again, your investment advisor has an important role
to guide you in this regard. For instance, with the robust performance of equity
markets over the last couple of years, you are probably over-invested in equities
and have therefore taken on more risk than usual. You will have to liquidate
some of your equity investments to bring it in line with your risk profile. With
passage of time as your risk profile changes, the same will be reflected in your
investments as well. The portion of investments in market-linked products like
equities and mutual funds is likely to reduce; instead greater allocations could be
made in assured return avenues like fixed deposits.

5. Don’t dip into your retirement savings

Since retirement money is sacred it is important that you treat it as such. Your
carefully drafted investment plan need not go for a toss every time you witness a
 cash crunch. Avoid dipping into your retirement monies, unless it’s urgent. A
one-time sum of Rs 5,000 invested over 30 years (at 10% compounded growth)
will swell to Rs 100,000. That is what long-term investing can do for you, so
money needs to go into your retirement savings kitty and not come out of it.
Retirement Planning-Case Study
Before we get on with discussing the case study, it is important to highlight that
retirement planning is

 a very personalised process that is unique to every individual.

 an ongoing process because what we are aiming at is not fixed (our standard of
living, which we are aiming to secure will change over time)

Our aim therefore in discussing this case study is to understand how you can get started
in planning for your retirement. For you to be able to draw up a personalised retirement
plan, you will require the services of a financial planner. In this note, we will discuss the
retirement planning process of an individual, say Kunal. Kunal is 30 years of age; he is
married and has a two year old child. He is a professional, employed in a IT company.
He draws a compensation of Rs 30,000 per month. His wife too is employed, as a
teacher. She draws a salary of Rs 15,000 pm. The present household expenditure is Rs
30,000 pm. Kunal is looking to retire at age 58 years.

Since we are focusing on retirement planning for Kunal and his wife, we need to look at
the cost they incur in maintaining their present standard of living. Let’s assume, Kunal
wants to, as of today, maintain the same standard of living post retirement i.e. he will
need Rs 30,000 per month (pm), adjusted for inflation, on retirement. Therefore, we
have to plan Kunal’s investments in a manner that they will yield an income of Rs
30,000 pm, 28 years from now. Post retirement, other than regular monthly expenditure
Kunal will incur expenditure on travel and healthcare.

Given that health costs are rising fast and we are traveling more for leisure, it is prudent
to set aside some money for these purposes. We have assumed Kunal will require Rs
500,000 per annum (pa) post retirement (Rs 125,000 pa in today’s Rupee terms after
adjusting for inflation). Another head of information that will be required is Kunal’s
present savings and the rate at which they are expected to grow over the years. These
savings could include balances with the Employee Provident Fund (EPF), mutual funds,
savings-based life insurance policies and fixed deposits among others.

The house that Kunal owns and lives in will not be added to his existing assets for the
purpose of retirement planning. This is because he lives in the house and will not be able
to generate income by way of rent or sale of property at the time of retirement. Finally,
before we get down to the numbers, we will need to make two assumptions :

 the average rate of inflation for the next 28 years

  the low risk rate of return you can earn 28 years from now; at 58 years of age
your risk appetite will be low and therefore a bulk of your investments will be in
very low risk securities that yield regular income

While it is difficult to say with certainty what the actual inflation and rate of interest will
be, we nevertheless need to have a starting point. In our view, an average inflation rate
of 5% pa is a reasonable estimate. As far as the rate of return is concerned 28 years
down the line, we think it will be about 5% pa. It is important to restate at this point that
retirement planning is not a one time exercise. As your standard of living changes and
the investment environment evolves, you will need to regularly make adjustments to
your plan so that you can achieve your objective. Therefore, these assumptions too will
change over time and Kunal will need to accordingly make adjustments to his saving
and investment pattern. It should be understood that Kunal’s financial advisor will have
an important role to play in the reassessment.