Retirement Planning: Factors, Plans, and Risks

This study examines retirement planning, including factors to consider, such as defined benefit and investment choice plans. It also discusses risks and issues, such as the time value of money, taxes, and opportunity cost.

Retirement planning

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Main Body.......................................................................................................................................3
Retirement planning.....................................................................................................................3
Defined Benefit Plan....................................................................................................................3
Investment choice plan................................................................................................................4
Consideration of important factors..................................................................................................4
Issues and risks............................................................................................................................5
Time value of money...............................................................................................................5
Taxes........................................................................................................................................5
Opportunity cost......................................................................................................................6
Other related factors................................................................................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

INTRODUCTION
The present study is based on the critical evaluation and analysis of the factors that are required
to be taken into account by the tertiary sector employees at the phase of retirement planning to
their position their superannuation contributions, in terms of both defined benefit plan and
investment choice plan. Along with this, the study will also cover the issues in the retirement
planning decision-making process, related to the time value of money, tax, opportunities and
other related factors.
MAIN BODY
Retirement planning
Retirement planning is considered as the handing over of savings for the stage of retirement. The
aim of retirement planning is to attain all financial targets; it is a procedure for the planning and
management of long and short term financial aspects of the employee to assist them in their later
retirement years (Trombetta, 2016).
There are mainly two types of retirement plans which are offered to tertiary sector employees for
retirement planning, namely defined benefit plan and investment choice plan. Both of these plans
are different in their own way. However, it is based on the employee to select one of them, by
considering their benefit, risks, costs and other aspects.
Defined Benefit Plan
The defined benefit plan is a plan in which employees are provided compensation in context with
the financial term benefits; it is totally financed by the employees, with the intent of benefitting
the employee. As per this plan, the employee is promised for a particular pension fund amount,
which they can take in the form of lump-sum or withdrawal (Bodie, 2015). The defined benefit
plan, the benefit payable to the employee at the retirement is identified by making use of a
formula, in its determination, factors like age, final average salary and employment years of the
employees are considered. Under the defined benefit plan, the retirement benefit of the employee
is computed as:

Retirement Benefit = Benefit salary × Length of membership × Lump-sum factor × Average
service fraction.
Furthermore, a defined benefit plan is the fixed amount of benefit, generally as a proportionate of
the employee earnings at retirement. In the DB plan, the employee is not able to know the actual
cost of the plan; in addition, there is variation held in contribution rates, on the basis of the
outcomes of standard reviews. Employees can predict the comprehensive benefits obtained by
them as their earning percentage before the retirement stage. In this plan, more ROI can lead to a
lower contribution rate (Bateman et al., 2018). Conversely, if the investments are not positioned
in a better way, the rate of the contribution must be raised to provide the guaranteed benefits.
The entire purchasing costs of a retirement pension can also adversely affect the rate of
contribution.
Investment choice plan
An investment choice plan has a set contribution plan meant for both employer and employee.
The retirement benefits for the employee will rely on the total money deposits, but employees
cannot forecast the pension benefits in advance (Henretta, 2018). Those employees who go for
the Investment choice plan, hold their own investment account including the individual
superannuation contribution and contributions sponsored by the employee, as well as a yearly
distribution of gained derived on invested contribution, subtracted with the managerial and
administrative charges.
CONSIDERATION OF IMPORTANT FACTORS
It can be stated that there are several factors that can impact retirement plan benefits. In terms of
the defined benefit plan, the elements can arise in the form of retirement age, length of rendered
service, and pre-retirement earnings (Beshears et al., 2015). On the other hand, factors related to
investment choice plan are amounts and rates of earning and contribution. In addition, both
plans are also prone to risk and uncertainty. So, before choosing a plan, it is essential to consider
their risks and ways to offset them to ensure optimal safety. In relation to the tertiary employees,
they are not expected to take higher risk, as they are more worried about their earnings are
subjected to low risk taking capacity.

It has been said that, for the low-risk capacity employee, the defined plan is the best. Due to the
fact that this plan is engaged with no or few risks as all of the benefit is sponsored by the
employer (Cheah and et al., 2015). On the other hand, if the employee has a higher risk capacity,
then they can opt for investment choice plan, due to the fact employee does the management of
their portfolio on their own.
Another factor that affects the retirement benefit is the money gained from the retirement plan
type. In terms of the defined benefit plan, the employer is often responsible for their contribution
of the money in the employee’s account, and the whole plan is sponsored by them, and the risks
are tolerated by the organization (Nyce et al., 2015). It can be asserted that certain factors can
create positive as well as a negative impact on the benefits and contribution namely; lower return
on investment, less rate of interest, higher payments to be made and changes in the new
employee recruitment and federal policies. Thus, it can be reflected that employee is required to
take into account their financial targets, goals, with the proper execution of planning, and
retirement strategies to ensure that their retirement safe, healthy and stable.
Issues and risks
Time value of money
The time value of money is the fundamental yet significant theory in finance and states that
dollar is more valuable at the present time in comparison with future time. Due to the fact that
investment of dollar must be made initially for gaining interest, and will help in gaining ongoing
returns (Fisch, Wilkinson-Ryan, and Firth, 2016). Under the time value of money, money is all
about time; it is essential that an individual invest the money as soon as possible to enjoy the
returns and benefits on late dates. Thus, with the concerns towards TVM theory, tertiary
employees employee must invest their money straight forward, thereby gaining access to more
returns, if not then they will face less value of the dollar and inflation damage on a future date.
Taxes
It can be reflected that tertiary employees should firstly consider the applicable taxes on their
selected retirement options, prior to making a choice. The plan of retirement includes pre-tax or
after-tax and at times both. Taxes are considered as the important element to be taken into

account, and for the retirees, it is more significant (Allen and et al., 2016). In addition to this, the
employees are required to be known and understood by the source of taxes and must be effective
at forming strategies to end the spending cycles on tax. Further, the amount acquired as
superannuation fund does not count in tax obligation, if the amount is paid to the employee at the
situation of death, in against of annuity or on retirement. Sound tax planning, and using suitable
tools, tertiary employees can reduce the effects of taxes on the funds of retirement. Thus, it is
vital for the employee to assess the effects the continuing saved retirement’s funds, eased by the
TVM theory, thereby helping in saving more money.
The pre-tax contribution help employee in maximization of savings in the pre-years of
retirement; on the other hand, the after-tax contribution helps in tax stress reduction at the
retirement stage. The pre-tax investment helps in delaying the tax payment for the employee on
the contributed amount and the gained earning in the account. In this way, the account’s value
may increase rapidly in comparison with the taxable investment. To this note, if payment of
taxes is made at a due date, then there are chances for investment or earning of the employee to
be taxable at a decreased rate. However, the after-tax contribution assists in developing a tax-free
income source on a future date, if the requirements and qualifications are satisfied. At the time
when employee considers savings, then the contributions made are not entitled to a tax deduction
but are tax withdrawal free, which can assist in decreasing the net taxable income, at the
retirement stage of the employee (Ahmed, Barber, and Odean, 2018). One more option is
available for the employee, i.e. annuity; it is long-term insurance type assist in payment of
income. Often, investors purchase an annuity for offering a mix of retirement income, security
and tax-deferred.
Opportunity cost
Opportunity cost is when an individual places their resources into one thing, at the cost of
placing the same into something else. In consideration with financial opportunity cost, this can
be associated with time or money (Bateman, Chomik, and Piggott, 2017). Further, the
opportunity cost is stated as the loss of money when an employee does not take optimum
utilization of the available money to them. In terms of retirement, one of the most general ways
opportunity cost covert it into manifest is the time when employee withdraw money out of their

tax-advantaged account. For example, if money is not saved for retirement till the time of 35
ages, rather than starting at the age of 25 can mean less of thousands of dollars, which is a
considerable opportunity cost.
Other related factors
In terms of a defined benefit plan, the affecting factors are age, formula used to identify
payments and earnings-related to pre-retirement.
In terms of defined contribution plan, the factors that affect are contributions and investment
earnings. There are several other factors which affect the retirement planning and superannuation
which are provided as below:
Inflation: Inflation impacts all type of retirement plan, and it creates a huge impact on the lasting
savings, in this way it is very crucial to make adjustments of the saving for avoiding the
unnecessary impact of inflation which can thereby lessen the money value (Dobrescu and et al.,
2017). Thus, it can be stated that inflation is the major factor which is required to be given high
priority at the time when retirees save money for their retirement, as such risk can frighten risk
secured money at a later time. Thus, this can impact the money by reducing value.
Planning: Planning is an important factor to be considered in the retirement phase, as it is a life-
span process. It is the responsibility of the employee to ensure that they earn more from the
investment, which will be beneficial for them in future. It is specified that the employee
requirement is to continue a long-term investment choice, which helps them in reaching their
financial objectives (Steinorth and Mitchell, 2015).
Investment performance: The progress and earnings on investments are stated as critical factors
to be assessed, to interpret the worthiness of invested money. This helps in knowing that if the
invested money results beneficial or not so that employees can stop making an investment in
deficit areas and make more in successful ones (Prast and van Soest, 2016). However, this can
be conducted by assessing the plan’s program and benefit. In case the investment tends to be
worthy, then the individual must conduct the process, however, if not then they must stop

making further investment, instead of that they should select another option to safeguard their
life savings.
CONCLUSION
On the basis of the above analysis, it can be concluded that it is totally dependent on the
employee decisions to whether to select a defined benefit plan or investment choice plan.
However, it can be stated that both of the plans have their own pros and cons, plus there are
various pre and pose factors that affect the same. In this way, it is recommended that employees
consider all related aspects from tax to cost, to reach an ultimate decision. So that they can
complete all their financial goals, and enjoy higher benefits and returns.

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