Financial Objectives in Retirement Planning

Retirement planning, in a financial context, refers to the allocation of savings or revenue for retirement. The goal of retirement planning is to achieve financial independence.

Without a judicious retirement plan in place, you run the risk of outliving your savings and not being able to maintain the desired lifestyle in your retirement years. You also run the risk of not being able to accumulate enough corpus for your dependant’s owing to unfortunate and uncertain events like death, disability etc.

Retirement planning helps you determine how much to save today for retirement; how to invest your savings to get the desired returns; how to protect your assets and provide for in case of unfortunate events and how to make judicious use of retirement income post retirement.

The process of retirement planning aims to:

• Assess readiness-to-retire given a desired retirement age and lifestyle, i.e., whether one has enough money to retire
• Identify actions to improve readiness-to-retire
• Acquire financial planning knowledge
• Encourage saving practices

Modeling and limitations

Retirement finances touch upon distinct subject areas or financial domains of client importance, including: investments (i.e., stocks, bonds, mutual funds); real estate; debt; taxes; cash flow (income and expense) analysis; insurance; defined benefits (e.g., social security, traditional pensions). From an analytic perspective, each domain can be formally characterized and modeled using a different class representation, as defined by a domain’s unique set of attributes and behaviors. Domain models require definition only at a level of abstraction necessary for decision analysis. Since planning is about the future, domains need to extend beyond current state description and address uncertainty, volatility, change dynamics (i.e., constancy or determinism is not assumed). Together, these factors raise significant challenges to any current producer claim of model predictability or certainty.

Monte Carlo method

The Monte Carlo method is the most common form of a mathematical model that is applied to predict long-term investment behavior for a client’s retirement planning. Its use helps to identify adequacy of client’s investment to attain retirement readiness and to clarify strategic choices and actions. Yet, the investment domain is only a financial domain and therefore is incomplete. Depending on client context, the investment domain may have very little importance in relation to a client’s other domains e.g., a client who is predisposed to the use of real estate as a primary source of retirement funding.

There are various kinds of needs and life-events, some of which are listed below:

• Retirement Corpus
• Buying a Home
• Post Retirement payout
• Job Transition
• Parenthood
• Children’s Education
• Children’s Marriage
• Insurance
• Tax planning