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1. Which of the following are misconceptions about estate planning?
The correct choice is D - The most prevalent misunderstanding is that estate planning is solely for wealthy individuals; however, the reality is that anyone earning and accumulating assets should engage in estate planning to establish a succession or inheritance strategy. Another misconception is that by registering nominees, the need for a will is eliminated. Nonetheless, the nominee may not necessarily become the asset owner. As per a will, the legal heir is determined, and in the absence of a will, the distribution of assets happens as per succession laws. Additionally, another misconception is that estate planning is only relevant later in life. Ideally, developing a comprehensive plan for the distribution of wealth should commence from a younger age.
2. What is the primary purpose of estate planning?
The Correct answer is option C - Estate planning involves creating a plan for managing and distributing a person's assets while they are alive and after they pass away. This is crucial to prevent family disputes and legal battles over inheritance. It also addresses the need for financial support in the case of long-term medical care during the later years of life. Estate planning usually includes making legal documents like a will or trust that explain how the person's belongings and other assets will be managed and shared in their absence. Additionally, it encompasses other aspects like assigning someone to make decisions on their behalf, outlining their healthcare preferences, designating beneficiaries for various assets, charitable giving etc.
3. Which of the following choices can provide you with regular income during your retirement?
The correct choice is D - An SWP allows you to withdraw a fixed amount at regular intervals from your investments in mutual funds. This arrangement of making an SWP from mutual funds is suitable for retirees seeking consistent payouts. An annuity is a financial product that provides regular payments over a specified period or for life. In the context of retirement, NPS and various pension plans offered by insurance companies offer annuity options, making them a popular choice for consistent cash flow. Even the non-cumulative fixed deposits in banks allow you to receive periodic interest payments, which can serve as a regular income source. These fixed deposits provide predictable and assured income at regular intervals, aligning well with retirement income needs.
4. As retirement age approaches, individuals should allocate a larger portion to ___________.
The correct choice is C - As retirement nears, the primary investment goal is to preserve the accumulated retirement fund. To ensure capital protection with minimal risk, it is advisable to allocate more towards less risky options such as FDs and debt mutual funds, which offer stable income. Allocation to higher-risk options like stocks, PMS, and equity mutual funds should be reduced as retirement age approaches.
5. What are the necessary investment prerequisites for retirees among the following choices?
The correct option is D - Indicating that retirees should focus on regular income and minimal risk. A retiree has no regular income as there is no monthly salary or income from business. Then, the primary requirement is to ensure a consistent cash flow from their retirement funds to cover regular expenses. After retirement, the focus shifts from accumulating wealth to preserving it. Low-risk investments help protect the capital retirees have accumulated over their working years, reducing the likelihood of significant losses. While high returns might be appealing, retirees should prioritize consistent income with minimal risk to preserve their funds.
6. Which investment options are well-suited for young investors aiming to build a retirement fund?
The correct option is C - Here's why: Due to the availability of a longer time frame to reach a retirement goal, young investors can afford to take more risks than when they are older. It is a known fact that investing in stocks and mutual funds have the potential for long-term wealth creation. Government-backed NPS can be a one-stop solution for your retirement savings as it provides flexible investment options, diversification, tax benefits and pension income in your retirement years. Another avenue worth considering is the PPF - a long-term retirement savings tool offering fixed income returns over a 15-year tenure, accompanied by tax benefits. Among the other options mentioned, while savings accounts and NSCs offer secure returns, they are more suited for short to medium term goals and may not be ideal for young investors wanting to build a retirement fund.
7. Which of the following actions can potentially deviate you from achieving a retirement goal?
The correct option is D - Depending on an inheritance to fund your retirement is a risky strategy. Inheritances are uncertain, and you cannot foresee when or how much you might receive. Relying solely on inheritance for retirement leaves you exposed if it doesn't come through or falls short. Similarly, delaying retirement savings to focus on immediate needs can have serious consequences, as compounding needs time to grow. Putting off retirement savings for other goals would mean you would need to contribute much more later years of life to reach the same retirement target. Also, using your retirement savings for unexpected expenses can disrupt your retirement plans. When you withdraw these funds prematurely, you lose the chance for them to grow, and you might also face penalties and taxes. Maintaining a separate emergency fund is vital to cover unforeseen expenses without compromising your retirement safety net.
8. What role does life expectancy play in retirement planning?
The correct answer is option B - As advancements in medical technology continue, the average life expectancy is on the rise. However, this poses a challenge: how to sustain ourselves over a longer than anticipated retirement period. Imagine a situation where an individual has budgeted their retirement finances until the age of 80 but lives on until 90. This is referred to as longevity risk and this can place a burden on their financial situation. Plus, don't forget inflation. The money you believe would suffice for a comfortable retirement might fall short due to rising expenses, especially medical costs. To deal with these challenges, it is advised to consider the longevity risk while calculating the retirement corpus. This way, you can make sure you can live the retirement life you dream of.
9. Which of the following is a retirement planning myth?
The correct answer is C - Many young people think they are too young to start saving for retirement. But, in fact, it's never too early to begin. If you start early, your money grows faster over time thanks to compounding. Even if you start with small amounts, you can still build up a good amount by the time you retire. Another myth is assuming that your expenses will drastically drop after you retire. While some costs might go down, like work-related expenses, childcare expenses, home loan EMIs etc., but other costs like healthcare, leisure, and travel might increase. So, it is smart to realistically estimate your retirement expenses to enjoy a comfortable retirement.
10. Why is it advisable to begin investing early to build up your retirement savings?
The correct answer is A - Starting early allows you to contribute smaller amounts regularly, taking advantage of the longer time for your investments to grow. This relieves the pressure of having to contribute larger sums later on. For instance, if you want to have a retirement fund of say Rs 3 crore by the time you are 60, you will need to invest around Rs 4,600 per month if you start at 25, with an expected return assumption of 12%. However, if you postpone starting until you are 35, you will need to invest around Rs 15,800 per month to achieve the same goal. Additionally, starting early maximizes the compounding effect, as your investments have more time to accumulate, resulting in significant growth over the long term.
11. Which of the following is the common mistake that one should avoid while saving for retirement?
The correct answer is option B - Many people overlook the impact of inflation while planning for their retirement. Inflation reduces the purchasing power of money over time. If you don't consider inflation when estimating how much money you will need for retirement, you might end up with a corpus that doesn't adequately cover your expenses in the future. For instance, if your monthly expenses amount to Rs 50,000, its value 25 years from now would be ~Rs 2.15 lakh, assuming an annual inflation rate of 6%. The value of your expenses is bound to increase in the future. Thus, it's crucial to account for inflation when estimating your retirement corpus.
12. What underlines the significance of retirement planning for your financial well-being?
The correct answer is D - Retirement planning is the process of preparing for your financial needs during your post-retirement years. The advancement in medical technology has given rise to longevity risk, i.e. people outliving their retirement savings. Additionally, healthcare costs are rising significantly in India (medical inflation is significantly higher than the normal inflation), making it necessary to have sufficient funds for medical expenses during retirement. Also, due to the shift from joint family to nuclear family, there is a dilution of traditional retirement support. Moreover, India lacks a comprehensive pension system, leaving a substantial portion of the informal workforce without a safety net. In light of the above factors, proactive retirement planning becomes a crucial step to ensure a secure financial future during your retirement years.
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