Chapter – 1

Introduction
 CHAPTER – 1
INTRODUCTION
1.1 Background of the Research – Global Perspective
Population ageing has become one of the most significant social
transformations of the twenty-first century. Every country in the world is experiencing
growth in the number and proportion of older population. The world population will
reach 9.9 billion by 2050, up 2.3 billion or 29 percent from an estimated 7.6 billion
people now, according to projections by Population Reference Bureau (PRB) included
in the 2018 World Population Data Sheet
Older adults’ (ages 65+) share of the global population increased from 5 percent in
1960 to 9 percent in 2018 and is projected to rise to 16 percent by 2050, with the
segment ages 85 and older growing the fastest. Children’s (ages 0 to 14) share is
falling, from 37 percent in 1960, to 26 percent in 2018, with a projected decrease to
21 percent by 2050. The timing and speed of age structure changes vary by country,
and these changes have important social and economic implications.
Figure 1.1 Percentage of population by age group

Source: United Nations Population Division, World Population Prospects: The 2017
revision (New York, United Nations, 2017)
From the above figure 1.1 the share of the older population increased from 5
percent in 1960 to 9 percent in 2018 and is projected to rise to 16 percent by 2050.
The percentage of people in this age bracket in the world’s more-developed countries

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is projected to reach 27 percent, up from 18 percent now, while the percentage of
adults ages 65 an older in less-developed countries is projected to double to 14
percent.
1.2 Background of the research –Indian context
India is young demographically with 90% of the population under the age of
60 years but ageing gradually It is estimated that persons above the age of 60 would
increase from ~8.9% of the population now to ~19.4% by 2050. And those above 80
are likely to increase from ~0.9% to ~2.8%.
According to the United Nations World Population Prospects, India's 60-plus
population is expected to reach 323 million by 2050 - a number greater than the US
population of 2012.
Figure 1.2 India Population by age 1980-2050 (Million)

Source: (Population Division of the Department of Economic and Social Affairs

ofthe United Nation Secretariat, World Population Prospects)

The above figure 1.2 presents the comparative historical data and future
projections on the dependency of the Indian population from year 1980 to 2050. It can
be seen that the percentage of dependent population has slowly increased in period
from 1980 to 2015. However, from the period 2015 to 2050 the percentage of

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dependent population is expected to increase at a higher rate. In 2050, India is likely
to have 15% of the old population being dependent on the earning population. This
makes it quite evident that greater resources will be required to be set aside for the
elderly population. With life expectancy still on the rise, the need to save and plan for
retirement is becoming ever more critical. (Williams, 2013). There is a significant
requirement for retirement planning, both at the individual level and for the Indian
population as a whole.
1.3 Current Pension Scenario – Public and Private Sector
Pension security is the major concern that affects people across the world.
Many economic, demographic and political factors influence the pension system in a
country. The policy makers around the world have realised the importance of
improving the pension system and have developed certain mechanisms in the form of
social security to protect the individuals under various contingencies associated with
life like retirement, resignation, and retrenchment, death of family head or
disablement.
Pension in India has conventionally financing through employer and employee
contribution. Over 78.5% percent of India's working population is part of the
unorganised sector. The organised sector including workers employed by the
government, state-owned enterprises and private sector enterprises comes around
21.5%, of which 7.2% are into government or public sector and rest of 14.3% into
private sector. (Economic Census – 2014). Mass of the population is not covered by
any official pension method. Only12% of the working population in India is covered
by some form of retirement benefit schemes. That means 88% of people still not
having any access to any form of retirement benefit and has to depend on their own
income or conventional and informal methods of old age income refuge such as the
combined family system. (Source: Population density-www.censusindia.gov.in ‐
2011)
Provident Fund is a defined-contribution, fully funded benefit program
providing lump sum benefit at the time of retirement. The provident fund system,
consisting of the Employees’ Provident Fund (EPF) and a number of smaller
provident funds is the largest benefit program operating in India. Together, the
schemes provide retirement benefits to about 10 percent of the labor force. Workers
(and private employers) contribute between 10 – 12 percent of monthly earnings, to
be returned to the employee in a lump sum payment at retirement, including

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accumulated interest.In 1995, the government partially converted the EPF scheme and
introduced the Employees’ Pension Scheme (EPS). In addition to the provident fund,
workers in both public and private sectors receive the second tier of lump sum
retirement benefit known as ‘Gratuity.’ It is paid to the workers who fulfill certain
eligibility conditions like a minimum qualifying service period of five years.
On 1 January 2004, A contributory pension system was notified by the GOI
which was named as “NATIONAL PENSION SYSTEM.” The NPS was
subsequently extended to all citizens of the country with effect from 1 May 2009,
including self-employed professionals and others in the unorganized sector on a
voluntary basis.
The private sector employees are eligible for some fixed pension under the
Employees’ Pension Scheme (EPS) on fulfilment of some terms and conditions. These
company pension plans are set up by employers and can provide benefits including a
tax-free lump sum (within certain limits), and pension income in retirement. These
schemes vary with the earnings of the employee
 Final Salary Defined Benefit Schemes: based on the final earnings
 Career Average Defined Benefit Schemes: based on the average earnings
throughout the career
 Defined Contribution Schemes: based on the value of the pension fund at
retirement.
Ageing population coupled with nuclear family system and partial coverage of the
existing benefit schemes for organized sector and increasing unorganised sector
employees not covered under any pension plan makes it of larger importance for
India to design a robust pension system to avoid poverty in old-age associated
with social distress.
1.4 Pension Framework
The World Bank’s five-pillar framework is one of the fundamental
benchmarks for comparing the pension industry in any country globally. The current
five-pillar framework is a transition from the three-pillar pension system suggested by
the bank in 1994. The current framework has been refined to adapt these principles to
widely varying conditions and better address the needs of diverse populations to
manage the risks in old age.

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A snapshot of current pension schemes in India under Five-Pillar Pension framework
is shown below.

Fig: 1.3 Five – Pillar framework

Source: (Financial security for India’s elderly - The imperatives, CRISIL Report)
1.4.1 Pillar Zero (non-contributory): Pillar Zero is a non-contributory social
pension framework, financed by the government, which provides a minimal level of
old age income. In India, this is provided by the Central government under National
Social Assistance programme covering Indira Gandhi National Old Age Pension
Scheme (IGNOAPS), Indira Gandhi National Widow Pension Scheme and Indira
Gandhi National Disability Scheme.
The total beneficiaries under the Indira Gandhi National Old Age, Widow and
Disability Pension schemes for the FY 2017 – 18 is 3.46 crore of which 40% are male
beneficiaries and 60% are female beneficiaries. (National Social Assistance
Programme Reports, 2018 - 19)
1.4.2 Pillar I (mandatory – pay as you go): The second pillar, termed Pillar I, is a
pay-as-you-go defined benefit (DB)pension framework, which is primarily tax /
expense funded and seeks to replace some portion of pre-superannuation income. The
aim of this pillar is to replace some portion of lifetime pre-retirement income and

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address risks such as low earnings, and inappropriate planning horizons due to the
uncertainty of life expectancies, and the risks of financial markets. The benefit under
this pillar was stopped for government employees in 2004,when there was a drastic
transition of Defined Benefit to defined contribution (DC) pension for all employees
joining from January 2004 (excluding defence services).
1.4.3 Pillar II (Occupational Pensions): The third pillar (Pillar II) is also mandatory,
but in the form of Defined Contributionpension system from the subscriber. It targets
the organised section of the economy with a wide set of design options, including
active or passive investment management, choice parameters for selecting
investments and investment managers, and options for the withdrawal phase.In India,
this pillar has a long history in the form of
a. Employees’ Provident Fund (EPF)
b. Superannuation fund
c. Coal Miners Pension and Provident Fund
d. Seaman’s Provident Fund
e. NPS for Central and State Government
a. Employees Provident Fund: This is a defined contribution scheme managed by
the Employees Provident Fund Organisation (EPFO). The EPF is one of the main
platforms of savings for all employees working in Government, Public or Private
sector Organizations. The Employee Provident Fund Scheme was enacted in the year
1952, with an aim of promoting
retirement savings for employees across India replacing the Employee Provident Fund
Ordinance, 1951. The EPF scheme is currently known as the Employees’ Provident
Fund and Miscellaneous Act, 1952. Presently4.5crore workforce engaged in 6 lac
contributing establishment and 63 lac pensioners are contributing into EPFO scheme.
EPFO Report 2018). The prevailing rate of interest stands at 8.55 per cent.It is ranked
as 21st largest pension fund globally. (Willis Towers Watson Report 2017)
The three schemes operated under the EPFO Act are
 Employees’ Provident Fund Scheme, 1952
 Employees’ Pension Scheme, 1995
 Employees’ Deposit Linked Insurance Scheme, 1976
Under the Act, the subscribed employees are eligible for provident fund, pension and
insurance benefits as per the above schemes. As part of the Digital India drive, the
government has launched a new application named UMANG, on which all the EPFO

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services were made available. All the EPFO members were allotted with the
Universal Account Number (UAN) to encourage One Member – One EPF Account.
Employees Pension Scheme: This Defined Benefit (DB) scheme offers pension on
disablement and widow pension with fixed contribution and pension rates. The
members of the EPF scheme are automatically enrolled into Employee pension
scheme. The employees of private sector organisations making PF contributions are
eligible for pension under the Employees’ Pension Scheme. The scheme is optional for
organisations with less than 20 employees and for PSUs and semi-government
organisations. The employer makes a contribution of 8.33% of the salary i.e basic plus
daily allowance and the central government also makes a contribution of 1.16% into
the scheme. The minimum pension amount drawn by the employee is Rs 1000 up to a
maximum of Rs 6500.An employee can start drawing the pension only after rendering
a minimum service of 10 years and attaining the age of 58 years. An early pension can
be drawn from the age of 50 years with a reduced rate of interest and full pension is
received from the age of 58 or earlier in the event of permanent disability or death.
Employee Deposit Linked Insurance Scheme: An employee who’s a member of
EPF is eligible for insurance coverage under EDLI scheme. It is a liability on part of
the employer to contribute to EDLI, 1976 to provide benefit of life insurance to the
employee. The employer contributes 0.5% of employee's Basic + DA as insurance
and charges 0.01% as administration charge to maintain EDLI to EPFO.
b. Superannuation fund: This benefit is provided by the employer to its
employees. Employer contributes a certain amount to a Group Superannuation policy
bought for this purpose and at the time of retirement, the employee starts getting
pension depending on the plan which employer has opted at the time of contribution.
c. Seaman’s Provident Fund:
The Seamen’s Provident Fund Scheme framed under the Seamen’s Provident Fund
Act, 1966 was introduced on 1st July, 1964 to provide Provident Fund for all Seamen
members engaged in the Navy. This is a defined contribution scheme with an
administered rate of return. The provident fund amount is invested and reinvested into
Central and State Government Securities, PSU Bonds, Money Market Instruments,
Mutual Funds and Equity as prescribed by the government.
d. Coal Miners Pension and Provident Fund: This is a defined contribution with an
administered rate of return, whereas the pension scheme is a defined benefit with a
fixed contribution and pension rate. Coal Mines Provident Fund Organisation is an

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agency of the Indian government established in 1948 under The Coal Mines Provident
Fund and Miscellaneous Provisions Act 1948.
The authority manages the following schemes:
 Coal Mines Provident Fund Scheme
 Coal Mines Family Pension Scheme (merged with Pension Scheme in 1998)
 Coal Mines Pension Scheme
 Coal Mines Deposit Linked Insurance Scheme
e. National Pension Scheme
NPS is a defined contributory pension scheme launched by Government of
India in 2004 for new entrants into the central and state government organisations.
This mandatory pension scheme was designed for all Central and State Government
employees to enable them to make optimum decisions regarding their future through
systematic savings during their working life. It is an important milestone in the
development of a sustainable, efficient and well-defined contribution pension system
in India. The NPS was established based on the Old Age Social and Income Security
project (OASIS Project 2000), Report of the Working Group (2001) and Report of the
high-level Expert Group (2002) commissioned by the Central Government.
Under NPS, pension is paid at the age of 60 and partial withdrawal is not
permitted before the age of 60. The government, however, does contribute a matched
amount in favour of the employees, which goes to the National Securities Depository
Limited, and fund managers invest the money in the market. Presently 57.90 lacs
central and state government employees subscribed for NPS that showed an increase
of 13% over last year. (PFRDA Annual Pension Bulletin 2017 – 18).

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 Table 1.1 No. of Subscribers (in lakhs)

Year/Month 31-Mar-16 31-Mar-17 31-Mar-18 31-May-18 30-Jun-18 31-Jul-18

Sector
A. CG 16.58 17.89 19.22 19.38 19.45 19.51
B. SG 29.24 33.32 38.68 39.13 39.43 39.7
Govt. sec
Total 45.82 51.21 57.9 58.51 58.88 59.21
(A+B)
Govt. sec % 11 12 13 12 11
growth
(YoY)

Source: (NPS Reports, 2018)

Fig 1.4 Number of Subscriber (in lakhs)

Source: (NPS Reports. 2018)

From the above table no. 1.1 and fig. 1.4, The total subscribers under Govt Sector
has increased to 59.21 Lakh under central government with 19.5 lacs subscribers
and 39.7 subscribers from state government. The year on year growth has been
recorded at 11%
1.4.4 Pillar III (Personal Pension): This pillar is voluntarily opted by subscribers.
Plans such as the voluntary segment ofthe National Pension System (NPS)i.e NPS lite
or Swavalamban, the Atal Pension Yojana, Mutual fund retirement plans, pension
plans from insurance companies and Public Provident Fund (PPF) come under this
pillar.

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a. NPS lite / Swavalamban: The government-authorized PFRDA is mandated to
offer NPS on a voluntary basis to all Indian citizens with effect from May 2009. To
encourage the workers in the unorganized sector, a new scheme “Swavalamban” was
initiated by the government with a contribution of Rs 1000 per annum into each NPS
account. NPS-Lite was introduced to widen the coverage.A subscriber under NPS can
withdraw a part of the corpus in a lumpsum and use the remaining corpus to buy
annuity to secure a regular income after retirement. Presently 43.95 lacs subscribers
from organised corporate sector and informal sector are registered under
Swavalamban scheme. (PFRDA Annual Pension Bulletin 2017 – 18)
Table 1.2 No. of Subscribers (in lacs)
31-Mar- 31-Mar- 31-Mar- 31-May- 31-Jun- 31-Jul-
16 17 18 18 18 18
C. Corporate
Sector 4.74 5.86 6.96 7.12 7.19 7.25
D. All Citizen 2.15 4.39 6.91 7.13 7.17 7.22
(Corp+All
Citizen) Sec
Total (C+D) 6.89 10.25 13.87 14.25 14.36 14.47
(Corp+All
Citizen) Sec %
growth (YoY) 50 49 35 34 32 31
E. NPS Lite/
Swavalamban 44.80 44.29 43.95 43.91 43.89 43.87
F. APY 24.85 48.64 96.06 99.82 103.20 106.79
Subtotal (NPS
lite+APY)
(E+F) 69.65 92.93 140.01 143.73 147.09 150.66
(NPS
lite+APY)
% growth
(YoY) 68 33 51 47 47 47
Source: (NPS Report, 2018)

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 Fig. 1.5 No. of Subscribers (in lacs)

Source: (NPS Report, 2018)

From the above table 1.2 and fig. 1.5 the total number of subscribers under
NPS &APY increased from 220.33 lakh at the end of May, 2018 to 224.37 lakh at the
end of July, 2018, and has recorded a growth of 1.83% in a month. whereas the total
number of subscribers registered under Private Sector (Corporate +All Citizen) is
14.47 lakh and has recorded year on year growth of 31%. The NPS Lite +APY has
recorded a year on year growth of 47% which is highest amongst the sector. The total
number of subscribers under NPS Lite + APY has grown to 150.66 lakhs, out of
which, APY has 106.79 lakh subscriber as on 31st July, 2018. The growth during the
month of July, 2018 for Govt. Sector, Private Sector, NPS Lite & APY has been
recorded as 0.56 %, 0.77% & 2.43% respectively. The overall year on year basis
growth under NPS is recorded at 35%.
b. Public Provident Fund: This is a funded and defined contribution scheme with an
administered rate of return. It is offered to individual investors without restrictions.
The benefits include total accumulations that can be withdrawn after 15 years of
service. Partial withdrawals are possible after five years. Only one withdrawal per
year is permitted. The 15-year period may be extended by rolling over accumulated
balances for further periods of 5 years. The current rate of interest on PPF is 8% (NSI
2018)
c. Mutual Fund Pension plans: These are defined contribution schemes and are
typically open to subscribers who are at least 18 years old. The benefits include a

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choice between full redemption of accumulation on attaining the age of 58, partial
withdrawal on retirement or a systematic withdrawal plan.
d. Micro-pensions: Micro-pensions are provided by microfinance institutions. In
recent years Micro-pensions have gained considerable relevance in India with the
development of MFI’s and NGO’s. Micro-pensions adhere to the needs of very
specific individual groups or local communities in exchange of low contributions and
low premium. In terms of coverage, one of the most successful example is Self-
Employed Women’s Association (SEWA). In 2009, 50,000 self-employed women
were enrolled in SEWA’s micro-pension scheme. Nevertheless, micro-pensions are
targeted to specific groups and can certainly be regarded as a measure to reach certain
economically disadvantaged groups but not the masses.
e. Atal Pension Yojana: Government of India has introduced the Atal Pension
Yojana with an objective to provide subscribers with a fixed pension ranging from Rs
1,000 to Rs 5,000. The benefit is fixed in this case, whereas the contribution varies
depending on the age and the amount of pension one opts for. The scheme is targeted
at the low-income group individuals of the unorganised sector. As on 31st March,
2018, a total of 96.06 lac subscribers have been enrolled under APY.(PFRDA Annual
Pension Bulletin 2017-18)
f. Unit-linked pension plans and annuities: Pension products offered by life
insurance companies
1.4.5 Pillar IV (non-financial): The fifth pillar is family or other informal financial
and non-financial support. This has been the traditional pension support in India.
However, it has been failing in recent times with the onset of urbanisation and
nuclearization of families.
1.5 Retirement – Introduction
Retirement is a life event that is affected by a number of variables at the
personal, social and economic level. Otto von Bismarck, German Chancellor in 1889
established the concept of retirement for disabled workers by age and have a well-
grounded claim to care from the state.
It is the point where a person is withdrawn from active working life and is not in any
kind of employment, business or occupation. Retirement is unique to each individual,
for some, it could mean working part-time during the transition to retirement, or
starting a small business. Further for others, providing financial support for children
or grandchildren, caring for aging parents, creating a legacy, minimizing one's tax

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exposure or paying off debt. Retirement is often used interchangeably with financial
independence, as both are achieved with enough savings, investment income, and/or
pension income to cover the living expenses.
1.5.1 Definition of Retirement
Several authors defined retirement in many ways
Atchley (1982), defined retirement as “withdrawal of an individual from employment
along with entitlement to income based on having been employed over a period of
years.”
Feldman (1994) define retirement as a decision taken after individual’s middle age to
exit from an existing job that has been held for some time.
Montalto, Yuh and Hanna (2000) describe retirement as to cease from full-time
employment.
According to American Association of Retired Persons (2003) “retirement means the
end of a full-time working life and the beginning of a different life, but without the
identity, prestige and status”.
Microsoft Thesaurus (2003) refers retirement as withdrawal,departure, giving up
work, leaving or retreating.
Lurborsky and LeBlanc (2003) describe retirement as both an individually earned
right to a period of leisure after a career of employment, and an age grade social
obligation.
Dan (2004:20) defines retirement as “a normative stage of life course in which one is
no longer
Types Of Retirement
1. Old age retirement
2. Early retirement
3. Retirement due to ill-health
4. Late retirement
5. Complete retirement from work or change of job
7. Semi-retirement with part-time work
1.5.2 Retirement planning: Concept and Significance
Saving for retirement is extremely important. Each individual looks forward to
spending the post retirement years happily. Most countries have their own retirement
systems and the system distinguishes between public and private sector employees
(Hassan et al, 2015). Out of the total Indian Population only 11% have a regular

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retirement benefit scheme. Public sector employees who joined prior to 2004 would
receive a monthly retirement pension. However, employees who joined the work
force after 2004 and those who are working in the private sector doesn’t enjoy any
such scheme. Under such circumstances there is a significant requirement for
retirement planning. Retirement Planning in India has gained a lot of importance
lately among the working population, its significance has never been as greatly felt as
it is now.
Each individual looks forward to spending the post retirement years happily. Financial
Planning for Retirement covers series of activities to accumulate wealth to cover
needs in the post-retirement stage of life.
Retirement planning is essential to:
 Prepare for unexpected situations
 Maintain a positive outlook to life
 Beat Inflation
 Invest in top - notch medical care
 Secure family’s future
 Keep oneself updated on retirement plans and benefits
 Safeguard one’s saving
The negative consequences of inadequate planning for retirement not only affect
individuals, but also their extended families.
Retirement Planning Process
Retirement planning is the process of determining retirement income goals and
the actions and decisions necessary to achieve those goals.
To ensure a secured life after retirement, it is important to have a well
designed and realistic retirement plan. In the Indian context, one cannot retire before
fulfilling their household duties. Therefore the retirement planning process in India is
a holistic process covering; savings, tax and investment; debt and risk management
and estate planning.
In a simple sense, retirement planning is the planning one does to be prepared
for life after paid work ends, not just financially but in all aspects of life. The non-
financial aspects include lifestyle choices such as how to spend time in retirement,
where to live, when to completely quit working, etc. A holistic approach to retirement
planning considers all these areas.

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 Fig 1.6 Retirement Planning process

Source: www.slideshare.net
1.5.3 Retirement Planning - PUBLIC SECTOR VS PRIVATE SECTOR
Although it is difficult to make additional broad sweeping retirement readiness
comparisons between private and public sector employees, some general observations
are worth noting.
Tenure - Defined Benefit plans are designed to reward length of service and
historically, public sector workers are generally long-term employees. Studies show
that whereas defined benefit plans tend to influence longer term service, defined
contribution plans tend to influence mobility. With defined benefit plans still as a core
retirement planning benefit for most public sector employees, on average, long-term
employees certainly tend to have a retirement planning advantage over private sector
employees. The Centre for Retirement Research at Boston College study referenced
above shows that when adding a pension benefit, public employees with more than 50
percent of their career in the public sector typically have a significantly greater
income replacement ratio than private sector workers Going forward, in instances
where there is a greater emphasis on defined contribution plans, younger employees
may not be similarly motivated to stay with one employer or in the public sector their
entire career. A recent study of Maine public sector workers indicates that over half of
the employees leave the public sector before reaching the 5 years of service necessary
to vest. Although this study may not be conclusive, the potential for this trend will be

15
worth watching in other states as defined benefit plans become less generous or are
eliminated for younger employees entering the public sector workforce.
Social Security Benefits - Approximately 30% of state and local government
employees do not participate in the Social Security System.19 Instead, they may be
required to make a similar contribution to their pension plan. Some longer-term
employees may think they are eligible for a full Social Security benefit but will
ultimately be subject reductions as a result of the Windfall Elimination Provision.
Pension benefit formulas for public employees are therefore designed to help mitigate
the absence of a monthly check from Social Security, particularly for longer term
employees. It is also worth noting that a spouse of a married public sector employee
may or may not be a public sector employee themselves and the combination of total
household benefits can vary widely. For example, although some public sector
workers may not be eligible for Social Security benefits, they may qualify for a
spousal benefit under their private sector spouses workrecord. Regardless, employees
who will not receive a check from Social Security or who did not contribute to Social
Security their entire career will need to understand and evaluate the impact on their
personal retirement readiness and make decisions accordingly.
Investing Retirement Savings - Although there has not been extensive research
comparing the investment behavior of public sector employees to private sector
employees, one study conducted by ING in 2010 indicates that public sector
employees generally prefer to avoid investment risk. The survey indicated that 74
percent of public sector employees are not risk takers and 50% are conservative
investors that want to protect savings and avoid possible losses.20 It is important to
keep in mind that this survey was conducted after a period of significant stock market
declines starting in 2008. Future studies should also evaluate if some public sector
employees consider their defined benefit plan benefits as a proxy for fixed income
and therefore may be willing to take more investment risk with managed retirement
assets.
Lump-sum distribution option- Another interesting recent development among
private
sector plans that still have defined benefit plans is an increase in the number of plans
that offer a lump sum distribution option at retirement. Between 1991 and 2005, the
percentage of plans with a lump sum option increased 38 percent from 14 percent to
52 percent.21 Anecdotal evidence suggests that when given the choice, a majority of

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participants elect the lump sum benefit and then do not always invest and spend it
wisely.22 Public sector plans on the other hand are less likely to offer a lump sum
option at retirement and promote the idea of a lifetime benefit via annuitization
options.
Public Safety Employees – Police, firefighters and other public safety employees are
generally offered full retirement benefits from defined benefit plans at earlier ages
than general employees and teachers. Many public safety workers may take an
unreduced pension as early as age 50. The longer that pension benefits are paid, the
more they will be impacted by compounded inflation, particularly for plans that do
not have automatic cost of living adjustments. After 20 years, the value of a pension
in terms of what it will buy could be cut in half or more. Public safety workers are
also less likely to be covered by Social Security benefits than other employees. To
maintain their retirement readiness, those who may retire from a dangerous and
difficult public sector job in their 50s should consider other employment on a full to
part-time basis for another 10 to 15 years.
1.6 CRITICAL ISSUES IN RETIREMENT PLANNING
1.6.1 Determinants of Retirement Planning
Several research studies revealed that individual’s planning for retirement is
affected by several demographic and psychological factors. Moorthy et al., (2012)
concluded that age, education level, income level, goal clarity, attitude toward
retirement and potential conflict in retirement are the factors influencing the
retirement planning behaviour. According to Lucia, Rey & Ares (2015) the decision
to save for retirement is positively related to level of formal education, job situation,
saving habits, area of residence and homeownership. Meanwhile the psychological
factors also play an important role in affecting the retirement planning behaviour.
1.6.1.1 Age
Several research studies have shown that age has a significant effect on
retirement planning and decisions. The life-cycle theory of savings predicts that
savings will increase over the life-cycle; the older a person gets, the more likely
he/she is to retirement (Modigliani and Brumberg, 1954; Harris et al., 2002; DeVaney
and Chiremba, 2005. Richardson &Kilty (1989) stated that age has emerged as an
important and consistent factor in human behaviour towards retirement planning.
DeVaney (1995) has found that age can guide pre – retirees and individuals in in

17
ground work process of planning. Lee and Law (2004) concluded that individuals are
more motivated to take action for retirement as their age and income increases. This
view is also supported by Montalto, Yuh and Hanna (Montalto & Hanna, 2000) who
suggested that income and age are found to be correlated in influencing individual’s
behavior towards planning for retirement. Contrary to this DeVaney, Gorham,
Bechman and Haldeman (1995) concluded that age is found to have negative
relationships to saving decisions for younger respondents. Huberman et al. (2007) and
Fernández et al. (2012) find a positive but decreasing relationship between
individual's age and his/her decision to save for retirement.
1.6.1.2 Education
Extensive research studies were conducted on retirement covering education
level. Major studies suggest that education level is one of important factors affecting
retirement planning preparation (Hogarth, 1985; Joo& Pauwels, 2002). Joo& Pauwels
(2002), conclude that sources of information will influence individual’s attitude,
decisions and intention towards retirement planning. Individuals confidence levels
increase with the higher education level. Men with higher education level tend to be
more confident and do better in their retirement planning compared to people who had
received lower levels of education level. On the other hand, Lusardi (2004) concluded
that older women are found less likely to have higher education. The effect of
education on women’s retirement makes women to be having less knowledge and less
financial literature on retirement and also retirement planning (Lusardi, 2004; Lusardi
& Mitchell, 2008). Joo and Pauwels (2002) suggested that women participation in
retirement planning preparation increases as they receive higher education. Individual
tend to be motivated towards retirement planning preparation with increase in the age
and the education level. Joo and Pauwels (2002) addressed that the confidence levels
and education are positively correlated. Joo and Garman (1998) concluded that
education levels are significant for future financial education programs. People who
are highly educated generally tend to possess and receive more investing knowledge
on retirement planning compared to those who are less educated. According to
Berheim and Scholtz (1993); Seong-Lim et al., (2000), formal education has positive
relation to planning skills. Li et al., (1996) concluded that formal education is
expected to increase the probability of having adequate financial resources for
retirement. People with low levels of education have to make a special effort to obtain

18
and understand information about complex investment assets (Lusardi, 2001), which
limits their possibilities of saving and investing for retirement.
1.6.1.3 Gender
Along with age and education level gender is also a significant predictor in retirement
planning studies. Yakoboshi and Dickemper (1997), from their study observed that
gender difference can be considered as the major influential factor for early
preparation in retirement planning as men and women differ in their views and
expectations. Lusardi & Mitchell (2008) concluded that Men are better prepared and
ready for their retirement planning compared to women. Glass and Kilpatrick (1998)
mentioned that women tend to be less prepared for their retirement planning due to
lack of adequate financial resources than men. From their study it was found that
women are economically and psychologically weak in retirement planning and are
influenced by factors such as limited economic accessibility, low wage and gender
prejudice.
Lusardi and Mitchell (2008) pointed out that majority of women do not have any idea
and plan to do their retirement planning and most of them only depend on the support
from their friends and family during retirement age due women are less equipped with
financial knowledge and financially literature compared with men. Several previous
research studies revealed that gender difference does not bring any effect to the
decision making on retirement. Joo and Grable (2001) highlighted from their study
that the likelihood of both genders’ behaviour on professional retirement help-seeking
are the same, however, women involvement rate in seeking help from professional are
slightly higher compare to men if they are given a chance. They more likely to seek
financial advice from experts and professional and those women who have better
financial knowledge and literature tend to do better and more successful in their
retirement planning (Lusardi, 2004; Lusardi & Mitchell 2008).
1.6.1.4 Marital status. Li et al., (1996); Lundberg and Ward-Batts, (2000);
Johannisson, (2008) has come to a common conclusion that investmentdecisions,
especially for retirement purpose, is affected by marital status. Married individuals are
more likely to be concerned about the financial stability of their family, and thus are
expected to be more likely to save for retirement. Lusardi (2001) also found that
individuals who have not thought about retirement are less likely to be married.

19
1.6.1.5 Income
Income level is perhaps another important variable in retirement planning.
Richardson & Kilty (1989) has concluded that income as a wealth resources is
important in retirement preparation work. Identifying income adequacy during
retirement age is not an easy task. According to Ruhm (1989), individual’s
preparation on retirement income varies from person to person. Joo and Grable (2001)
identified that the attitude towards seeking professional help for retirement planning is
partially influenced by income. The statistical analysis shows that people who have
higher income are more motivated to seek professionals help regarding investment-
related decision, but the people who come from lower income group which had less
income are less likely to look for professional help on retirement investment
decisions. For this reason, income can be considered very much associated to the
retirement income source (Richardson &Kilty, 1989).Based on Kim, Kwon and
Anderson (2005) addressed that attitude and behavior towards retirement are
influence by income in general. Income is a critical and essential measurement in
some matter relating to retirement especially when in retirement education program
(Joo& Garman, 1998) and professional financial help-seeking (Joo& Grable, 2001).
According to Joo and Garman (1998), income will definitely impact on the financial
education programs topic which workers are looking for.
1.6.1.6 Retirement Age
The retirement age of public sector employees is been fixed by the
government, but there is no fixed retirement age for private sector working
individuals.
TAN and FOLK (2011) concluded that expected retirement age for all ages affect
financial planning preparation. Studies on retirement preparedness typically assume
that people will retire at a fixed age. Earlier-than-expected retirement has been
associated with adverse health and labour market shocks (Anderson et al., 1986;
Disney and Tanner, 1999; Loughran et al., 2001). Barring injury or illness, the timing
of retirement can be a matter of choice; workers can choose to when to retire, just as
they choose how much to save.
The above discussions gives rise to a thought in the mind of the researcher that in
what way does these demographic factors age, education, gender, income, marital
status and retirement age affect the various practices followed by individuals for
retirement planning.

20
1.6.2 Retirement Planning And Women
Saving for retirement is one of the major priorities for most working
individuals. Retirement planning and ensuring a perennial flow of income as pension
after retirement play a crucial role. The basis of a retirement plan is the accurate
determination of the savings goal. According to Monster Salary Index (2017), there is
a huge gender pay gap, where women earn 20% less than men. This shows that
women contribute less towards their savings than men and are exposed to greater risk
than men to achieve a secure retirement.
The barriers to women’s greater financial well – being are low financial
knowledge, confidence and outcomes. (OECD 2013). OECD and other studies show
that women have lower financial knowledge than men both in developed and
developing countries. They are less knowledgeable and less interested in financial
issues than men. They appear to be less confident both in financial knowledge and
financial skills especially with complex financial issues.
According to American National Institute on Retirement Security survey
(2016), women aged 65 or older are 80% more likely to live in poverty than men.The
survey identified that women often face more financial challenges than men as a
result of lower salaries, prolonged career breaks, risk-averse investments and relative
longevity, thus exposing them to more financial challenges in their post – retirement
life.
1.6.3 Financial Literacy And Retirement Planning
The reforms in retirement income policies have shifted the responsibility from
government to individuals to fund for their retirement (Bonoli & Shinkawa, 2005).
This imposes a greater responsibility on employees to save and invest in their
retirement wealth sensibly.
Major research studies around the world shows that individuals display low levels of
financial literacy to make complex financial decisions and financial illiteracy leads to
lack of financial planning and insufficient funds in retirement (Lusardi and Mitchell,
2014).
Financial illiteracy is a critical barrier to financial inclusion. Because of a lack
of knowledge about finance and financial products, many people are unable to access
banking and financial services, and are therefore kept out of financial markets.
Financial literacy is therefore highly important to people’s financial well-being and to
the overall health of a country’s economy.

21
 A global survey conducted by Standard & Poor’s Financial Services (2014)
reveals that low level of financial literacy persists around the world with only 33
percent of the adult population being financially literate. Of the total literate
population, Women’s (30%) financial literacy levels are lower than men’s (35%). The
literacy rate is high in US (57%), when compared to rest of the world. Another survey
by Standard & Poor has found that, 25% of adults or less are financially literate in
South Asian countries. India with 17.5% of the world’s population, of which nearly
76% of its adult population does not understand even the basic financial concepts.
The survey confirms that Indians have a poor financial literacy compared to the rest
of the world.
The Indian economy has witnessed a number of structural and fundamental
changes in the financial markets. The savings rate has increased, but with a low
conversion rate of savings to investments. Thus, the policymakers have understood
that financial literacy is an essential life skill and the sustainability of the economy is
possible only when the financial literacy amongst individuals and households
increases. (Jariwala, 2013). Financial illiteracy puts a burden on the nation in the
form of higher cost of financial security and lesser prosperity.
Many countries have started financial literacy promotion way back in 20 th
century. In the US, the American Credit Union Movement has started the financial
literacy promotion way back in 1908. Australia provides financial literacy
education through customized programmes. India is all the way behind developed
nations in financial literacy efforts.
The Organization for Economic Co-operation and Development (OECD) has
started an inter-governmental project in 2003 with the objective of providing ways to
improve financial education and literacy standards among individuals through the
development of common financial literacy principles.
1.6.3.1 Definition of Financial Literacy
The President’s Advisory Council on Financial Literacy (PACFL, 2008), that was
convened in US “to improve financial literacy among Americans” defines financial
literacy and financial education as follows
Financial literacy: the ability to use knowledge and skills to manage financial
resources effectively for a lifetime of financial well-being.
Financial education: the process by which people improve their understanding of
financial products, services and concepts, so they are empowered to make informed

22
choices, avoid pitfalls, know where to go for help and take other actions to improve
their present and long-term financial well-being.
OECD (2005as) defined financial education as, the process by which financial
investors improve their understanding of financial products and concepts and, through
information, instruction and objective advice, develop the skills and confidence to
become more aware of financial risks and opportunities, to make informed choices, to
know where to go for help, and to take other effective actions to improve their
financial well-being.”
Table 1.3 illustrates the breadth of conceptual definitions, drawn from a number of
studies and placed in chronological order.
Table 1.3 Conceptual definitions of financial literacy
Source Conceptual Definition
A combination of awareness, knowledge, skill, attitude and
behaviour necessary to make sound financial decisions and
OECD ultimately achieve individual financial wellbeing.’
Hilgert, Hogarth, Financial knowledge
& Beverley -
2003
FINRA (2003) “The understanding average investors have of regulations, market
principles organizations and instruments,”
Moore (2003) “Individuals are accepted to be financially literate if they are
capable and can demonstrate they have used knowledge they have
acquired. It is not possible to directly measure financial literacy so
proxies must be used. Literacy is gained by practical experience
and active integration of knowledge. As literacy levels rise
individuals become increasingly more financially sophisticated
and it is conjectured that this may also mean that an individual
may be more competent”.
National Council “Familiarity with basic financial and economic principles,
on Economic knowledge about the economy, and understanding of few
Education important economic terms”
(NCEE) (2005) b
Worthington the ability to make informed judgments and to take effective

23
(2006) decisions regarding the use of management and money
Mandell (2007) “The capability in evaluation of new and multifaceted financial
instruments and make informed judgments in both choice of
instruments and extent of use that would be in their own best
long-run interests”.
Lusardi and Acquaintance with “the most elementary economic concepts
Mitchell (2007c) required making rational investment decisions”.
Lusardi and Focus on debt literacy, a component of financial literacy,
Tufano (2008) defining it as “the ability to make basic decisions regarding debt
instruments, in particular how one applies primary knowledge
about compounding interest, measured in the context of everyday
financial choices”.
ANZ Bank “The ability to make informed decisions and to take effective
(2008), drawn decisions regarding the use and management of money”.
from Schagen
(2007)
Lusardi (2008a, “Knowledge of basic financial concepts, such as the working of
2008b) interest compounding, the difference between nominal and real
values, and the basics of risk diversification” (p.2).
Remund (2010) a measure of understanding key financial concepts
Lusardi & ability to process economic information and make informed
Mitchell, (2013) decisions about financial planning, wealth accumulation,
pensions, and debt.

1.6.4 SOURCES OF RETIREMENT INCOME

Savings for retirement is a wise course of action. Every retiree should have a
variety source of income to protect themselves from retirement savings deficit. In
developed countries like US, the financial needs during retirement are met from three
common sources social security benefits, employer sponsored pension benefits and
personal savings.
These three sources have often been compared to three legs of a stool which many
financial planners described it as “three - legged stool model”. (fig. 1.6)

24
Figure 1.6 Retirement Planning Sources - Three legged stool model

Source: (www.impromed.com)
This model still exists but with a change in the legs, that would probably look
more like a large column with two small kickstands (fig. 1.7).The first leg i.e. social
security trust funds are projected to be depleted by around 2034, at the current rate of
output. (Social Security and Medicare Boards of Trustees, Annual report 2015). In
the United States, the observers have rightly focused considerable attention on the
looming depletion of the Social Security Trust Funds.
The second leg i.e. the defined benefit pension is being replaced with 401(K),
a defined contribution retirement plan. The third and the main leg i.e. personal savings
that holds up the retirement. This three - legged stool model would probably look
more like a large column with two small kickstands. This makes it important for
people to save more during the working years.

Figure 1.7 Retirement planning sources (India)

Source: (www.impromed.com, 2015)

25
 From the above Fig. 1.7 the sources of retirement income situation in India is
scary with only one source i.e. through personal savings. The non-existence of social
security and lack of employer provided retirement benefits has practically transformed
three - legged stool to only one leg (fig). Thus, for majority of the people in the
country, retirement is an unstable affair with major responsibility on the individual for
his /her retirement.
The above discussion emphasizes that every individual must take timely actions and
plan for retirement. Researcher is keen to understand the factors which enhances
willingness or makes an individual inactive towards retirement planning.

1.6.5 Savings and Investment For Retirement

Saving and Investment are two key macro variables which play a significant
role in economic growth. Savings enable people to manage emergencies, to smooth
out peak income and expenditure to make investment in homes, families and
businesses and to provide for old age. Savings is the surplus money invested by the
people in various avenues. It is the difference between income and consumption
(Abdus Salam and UmmaKulsum, 2002). It can be in the form of an investment in
land, gold, insurance, financial instruments etc. Savings is important for an individual,
organisation and the economy as a whole (AnandaVikatan, 1999). Savings is a habit
specially embodied to women (Gnana Desigan C, KalaiSelvi S, Anusuya, April
2006). Savings will help the people to safeguard themselves from any risk in the
future. Savings will also help an economy to generate more funds which will help
business to flourish.
Investment is purchase of a monetary asset with a motive to earn a return on
investment in future. The investors save a portion of their current income to meet the
future needs such as building a house, education of children, marriage of children, use
in retired life etc., Through savings and investment, these objectives can be achieved
when properly planned, promoted and channelled (Jane Cowdell, 2001).Investment
means the purchase made by an individual of a financial or real asset that produce
returns, proportionate to the risk assumed over some future investment period (Adline
Gelzie.W, 2008).
Investment is classified into financial and economic terms.

26
 Financial investment allocates monetary resources into assets that are expected to
yield some gain or positive return over a period of time. These assets range from
safe investments to risky investments.
 Economic investments have a rather precise meaning in the literature of economic
theory. It includes net additions to the capital; stock of society, by capital stock of
society is meant those goods which are used in the production of other goods.
Investment avenues are the various ways or the different types of securities in
which an individual can invest their money. In order to achieve this, one has to decide
on how and where to deploy the savings, that can best meet the future requirements
for money. (Intelligent Investors, 1997). A wide array of investment alternatives is
available for creating retirement income. The commonly chosen financial assets for
retirement planning are listed in Table 1.3.
Table 1.3: Common Investment Alternatives

Source: www.relakhs.com

27
 The above table 1.3 depicts the common investment alternatives available for
the investors. Selection of a perfect investment avenue is the most difficult task to any
investor (Sonali and Kalpana, 2014). Women are less likely to take investment risks
for whatever reason many women are less willing than men to take risks (Shanthi and
Murugesan, 2016).

Source:www.relakhs.com/rbis-statistical-data-on-households-savings-
investments-2015
As per the above data, it is very clear that most of the household savings are
routed to bank deposits. Investments in shares, mutual funds and debentures were
abysmally low.
Fig 1.8: Segmentation of Investment by Households in India

Source: Shailesh Singh Thakur, 2 Dr. SC Jain

28
1.6.6 Behavioural Finance and Retirement Planning
Investment decisions are the crucial challenges faced by the investors. This
needs better insight, and understanding of human nature in the existing global
perspective, plus development of fine skills and ability to get best out of investments.
Every investor differs from others in all aspects due to various factors like
demographic factors which includes socio-economic background, educational
attainment level, age, race and sex. In the early years, investment was based on
performance forecasting and market timings which produced ordinary results with a
huge gap between expected returns and actual returns due to impact of psychological
factors. Therefore the researchers began to study the field of Behavioural Finance to
understand the psychological processes driving these irrational decisions.
Thus, investor behaviour represents the financial behaviour of the individual.
Understanding the behavioural finance will help the investors to select a better
investment instrument and avoid repeating the expensive errors in future. So,
behavioural finance has become an integral part of the decision-making process, as it
heavily influences investors performance. An optimum investment decision plays an
active role and is a significant consideration. In designing the investment portfolio,
the investors should consider their financial goals and risk tolerance level. Each
investor tries to build good portfolio. A good portfolio is more than a long list of good
stocks and bonds. Basing on the risk bearing behaviour of the investors, the investors
can be grouped into risk neutrals, risk averse and risk taker.
Table1.4: Risk – Return analysis of the Investment Avenues
Return Return Risk Marketabili Shelter Convenien
Current Capital ty Liquidity Tax ce
Yield Appreciati
on
Equity Low High
Shares High Fairly high High High
Non-
Convertib
le
Debentur
es High Negligible Low Average Nill High

29
Equity
Schemes Low High High High High Very High
No tax
Dividen
Debt Moderat ds
Schemes e Low Low High Very high
No tax
on
Debt Moderat Dividen
Schemes e Low Low High ds Very High
Bank Moderat Negotiab
Deposits e Nill le High Nill Very High
Public Section
Provident 80 C
Fund Nill Moderate Nill Average benefit Very High
Life Section
Insurance 80 C
Policies Nill Moderate Nill Average benefit Very High
Residenti Moderat Negligibl
al House e Moderate e Low High Fair
Gold and
Silver Nill Moderate Average Average Nil Average
(Source: Chandra Prasanna, “Investment Analysis and Portfolio Management”, 2007,
Second Edition, Tata McGraw Hill, Pp 9)
The above discussion emphasizes that the investor should be rational in the selection
of the investment avenues for their retirement life as well as to utilize the fund at any
emergency time or for handling their monthly expenses.

Post reviewing the concept of retirement, definitions from researchers all over the world,
the factors affecting retirement and the interdependency of retirement planning with all the
elements of personal financial planning, researcher views retirement as an inseparable part
of everyone’s life with full or partial stoppage of regular income. A very dynamic phase in
life affected by behavioural, social, psychological, physiological, political, economic and
financial factors. Although all the factors are equally important, researcher mainly focused

30
on the financial part as the area of study. Along with the financial aspect, the attitude and
the behavioural aspect is also considered for the study.
1.7 Concept of Financial Planning
The study revolves around the financial planning and retirement. So after understanding
definitions and concept of retirement, researcher now tries to understand the concept of
financial planning in the subsequent section. Following are the areas of discussion in this
section.
Individual Financial Life cycle

Finance helps in the smooth movement of all the aspects of life. Financial
Planning is the most important sector while planning finances. Compared to money
matters, all the other matters are secondary. Personal finance refers to the financial
management of which an individual or a family unit is required to make, to obtain,
budget, save, and spend monetary resources over time, taking into account various
financial risks and future life events.

Financial planning is the process of developing a personal roadmap for one’s

financial well-being. The inputs to the financial planning process are: Personal
finances, i.e. income, expenses, assets, and liabilities, personal goals i.e. current and
future financial needs and personal appetite for risk. The output of the Financial
Planning process is a personal financial plan that tells how to use the money to
achieve the goals, keeping in mind inflation, real returns, and taxes. In short,
financial planning is the process of systematically planning ones finances towards
achieving his/her short-term and long-term life goals.
Figure 1.8 Individual Financial Life cycle

Wealth Creation Stage

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