Retirement and Estate Planning - Essay Example

?PERSONAL FINANCIAL MANAGEMENT Table of Contents Table of Contents 2 Retirement and E Planning 3 Introduction 3 Four Aspects of Retirement Planning 4 The Retirement Planning Process and Personal Retirement Plan 5 Estate Planning Process and Personal Estate plan 7 References 9 Retirement and Estate Planning Introduction Out of many, retirement is an event which is very much critical to our lives that we will get to experience. If we look at it either from our personal or financial perspective, planning to retire comfortably is truly an extensive process. It requires planning sensibly and being persistent for years. Retirement management does not stop when we retire but is an ongoing process. Retirement plan is nothing but a plan which replaces our employment income after we retire. In terms of tax, retirement plan is defined by the Internal Revenue Service (IRS) code in US. Dream of leading a secured and comfortable retired life can come true only with proper retirement planning. A plan to transfer ones estate after death is known as estate planning. Estate includes all the personal properties like cash, land, houses, jewelry, investment accounts, etc. Estate planning is done to ensure and fulfill certain objectives like transferring most of the estate to ones beneficiaries, least payment of taxes for the estate, etc. Estate planning is a continuous process and should start immediately when a person has a measurable base of assets (Gitman, Joehnk & Billingsley, 2010, p.18). Estate plans should be in accordance with ones goals and objectives in life. Loved ones can face undue financial burden due to inadequate estate planning. Four Aspects of Retirement Planning Retirement planning can be thought of as a framework which includes four main aspects (Prudential Financial, n.d). They are: i. Social Security: Social Security is an insurance program that provides several benefits to individuals like, retirement benefits, disability benefits, etc. ii. Employment based plans: These are retirement plans provided by employers to the employees. It includes defined contribution and benefit pension plans. iii. Personal Savings: The returns on investments made by individuals that can add up to the Social Security Benefits or Employment based plans. It includes options like IRAs, Bank Deposits, Mutual Funds, Annuities, etc. iv. Retirement Choices: For retirement security, lifestyle and financial choices play a significant role. Lifestyle choices include choice of retirement age, place of retirement, etc. Financial choices include allocation of assets in retirement, conversion of assets to income and then protecting that income. The Retirement Planning Process and Personal Retirement Plan The retirement planning process constitutes several steps. These steps are discussed one by one and how it relates with my personal retirement planning is also discussed below. The first step in a retirement planning process includes setting own personal goals and objectives in life. Next these objectives have to be arranged in descending order of priority. Also these objectives should have the time horizon included in it. These objectives can be revised and changed in due course of time. Now this step can be related to my case in the following way: My personal objectives in life arranged in decreasing order of priority with time horizon mentioned along with it are: 1. Maintain the standard of living on retirement at the age of 50 after 20 years. 2. Buying an expensive motor car within 2 years. 3. Buying a home within 5 years. 4. To make a mortgage investment within 10 years. 5. Paying off all the mortgage bonds within 20 years. The second step is about calculating and determining the money required for fulfilling each of the objectives. All the household incomes and expenditures are to be calculated and the difference is also to be calculated. Present value of money should be considered while doing the calculations and the annual inflation rate should also be taken into account. This can be applied in my personal retirement planning process in the following way: If I am to retire today, I would have required $2500 per month to maintain the same standard of living as I am enjoying today. This includes all the monthly household income less the monthly expenses incurred. Now, assuming 4% inflation rate, amount required in 20 years time when I retire, will be $ 5477 per month or $ 65734 per year. Next, in order to generate $ 65734 per year on a regular basis after my retirement, it depends on the return I receive on the investment or the interest rates. Now assuming that the average rate of interest on my investment is 10% per annum, then the lump sum amount required to generate $ 65734 per year is $ 657340. Now the question is how much I need to save to have this lump sum amount at my retirement age. I need to save $ 11129 per year or $ 928 every month for the next 20 years in order to enjoy the same standard of living after my retirement as I am enjoying today. The next step of retirement planning includes planning for the investment to provide for the money one needs to have at the time of retirement. Based on the criteria of investment there are various investment options available. Hence, one has to set the investment objectives as such which best suits the individual requirements. Whether ones budget will permit investing on those avenues is also an important consideration. If one cannot afford such investments depending on his budget, then he has to change his investment objectives. Like, in my case I have thought of investing in mortgages, but I have to find out whether it is affordable for me to invest in mortgages or not. If not, I have to look for other options of investment. Estate Planning Process and Personal Estate plan Estate planning is a continuous process which may change with time and should be updated or changed accordingly. Some of the major tasks in estate planning process are: a. Creation of a will. b. Minimizing taxes on estate. c. To find a suitable guardian for the dependants. d. Identifying an estate executor who will look after the terms and conditions of the will. e. Updating the beneficiaries or the nominees mentioned in the life insurance plans, IRAs and other plans, as and when it is required. f. Setting up arrangements required for funeral. g. Reduction of taxable estate through annual gifting. h. Drafting of a durable Power of Attorney (Parrot, 2011, p.140). Hence, I can have a proper estate planning by considering the following steps: Firstly I need to identify my heirs. Then, the heirs who will be controlling the assets are to be decided. Then the next step would be establishing the value of the estate property owned by me after properly identifying each of the owned property. Next, the liabilities associated with the estate property are to be found out. Liabilities can be in the form of different costs associated with the assets like estate duty. Proper analysis of the liquidity of the assets is also required. Next step in the estate planning process would be to select the estate planning technique which would be most suitable and appropriate. It can be done with the help of professional planners (Swart, 2004, p.91). The next step would be to effectively implement this estate plan. This will require proper documentation of the estate plan. The Estate Planning Attorney will help in preparing such legal documents. Some of these legal estate planning documents are: a) Last Will and Testament b) Living Will and c) Financial power of attorney. After all the documents are ready, it will be informed to the heirs identified earlier. All these steps in estate planning are interrelated to each other and would require a proper revision before it is completed. References Gitman, L. J, Joehnk, M.D. & Billingsley, R.S. (2010). Personal Financial Planning. (Ed.12). USA: Cengage Learning. Parrot, H. (2011). Seven Steps to Financial Freedom in Retirement. New Jersey: John Wiley and Sons. Prudential Financial. (no date). The Four Pillars of US retirement. Retrieved on March 17,2012 from http://research.prudential.com/media/managed/documents/research_perspective/FourPillarsonepagefinal.pdf. Swart, N. (2004). Personal Financial Management. (Ed.2). USA: Juta and Company Ltd. Read More