Understanding Behavioural Aspects Of Financial Planning

Retirement Planning for Tertiary Sector Employees

Discuss about the Understanding Behavioural Aspects Of Financial Planning.

By considering the retirement laws and rapid increase in recognition among employees regarding the importance of savings, numbers of retirement contributions are revolving around in retirement funds and financial institutions. In the contemporary world, it is essential to gain a better understanding of the retirement planning to identify retirement goals and the activities to be performed to achieve the same in current context. It is very important for the tertiary sector employees to interpret retirement planning, as they have a comparatively short period of employment. Their work schedule is based on their technological knowledge, having rapid obsolesce with the technological advancement. Organizations provide two types of a pension plan to their employees these are Defined Benefit and Investment Choice plan, the decision is of the employee which one they want to choose. They must make a decision according to their needs, goals and financial targets in order to shield their future.

The present study provides highlights on the superannuation plan for the tertiary sector employees for making investment and savings at the time of retirement. The government of Australia has provided great support in retirement savings to motivate employees to save more; they have obligated minimal contributions in suitable superannuation funds for the employees. This low contribution level was established in order to reduce the stress forced by social security system about the pension payments for providing support to employees at the stage of retirement (Bodie, 2013).

A defined-benefit plan refers to retirement plan sponsored by the employee, wherein employee gets benefit which is calculated by making use of a formula that assesses multiple factors for example employment length and background of salary (Clark, Lusardi and Mitchell, 2015). Portfolio management and risk associated with an investment are administered by the company for the plan. Moreover, restrictions are also placed on the withdrawal of funds, for example, specified methods and time of withdrawing funds. A defined benefit pension plan is an investment plan whereby an employer assures an employee for given pension payment, in a lump-sum amount that is computed by a formula based on the salary history of employee (Keynes, 2016). Determination of tenure of age and services are also assessed instead of relying on personal investment returns on a direct basis (Thakur, Jain and Soni, 2017). The defined benefit plan is a plan in which the benefit is compensated to employees at the time of retirement and is identified by making use a formula, which  features in key determinants like the final average salary of the employee, their age and amount of time by which they were employed.

Defined Benefit Plan and the Investment Choice Plan

Investment choices plan is an offer provided by most of the superannuation funds. This type of plan enables a member of super fund to choose whether they want to invest their super fund or not. Being a super fund member, the employee can generally decide from a range of investment portfolios, like a balanced option, cash option, growth option or conservative option (Marglin, 2014). Those employees who can select Investment choices plan can hold personal investment account including individual contribution as well as superannuation funds sponsored by employees, plus a yearly allocation of gains made on their invested funds, minus any administration as well as management charges. The territory employees can vote of the kinds of the assets or the portfolios under the plan of investment choice towards the superannuation assistance which is invested in and also selecting among the 4 strategies of investment. They are a secure fund, which is cash and security of fixed interest of Australia (Merton, 2014). The selection fund of Trustees is a balanced fund of overseas and domestic shares, infrastructure, property assets and private equity reserves. Next is the Stable fund, which includes bond and fixed interest securities along with a little disclosure to local and international shares and property. Last is the Shares fund where the investment is exclusively in local and international shares.

Both of these investments possess risk, by considering the same it is essential for the employees to know the risks of making an investment in these funds. The nature of these investment options, it is considered that employees are not likely to hold risk, due to less bearing on risk employees must select defined benefit plan, and on the other hand, if the employee is likely to hold high risk, then they can go for investment choice plan (Larimore and et al. 2009). Defined benefit plan is less risky because this is produced and provided by the organization, while the Investment choice plan is highly risky, as the management of the portfolio is done by employees. Initially, it is significant to assess the ability and readiness to bear risks after decision shall be made (Gitman, Juchau and Flanagan, 2015). If the employee does not want to associate with risk, then the best option is defined benefit plan because all the risk is borne by the company. However, if they make an investment in Investment choice plan, then they will have an option regarding the asset portfolio where they want to invest.

Important factors to be considered by tertiary sector employees

The main factor is to determine the current financial position of employee itself to pertain income, debt, savings and expenditure. In order to develop a structure of savings, expenditure on various aspects, assets and balances will provide a proper base to the employee for making a decision on what plan is to be selected. The prevailing financial condition of employees states the capacity to bear risks to make a contribution to the retirement plan (Bateman and et al., 2014). This can understand by taking an example, in a situation where an employee has secured investment sources that they must no doubt go for investment choice plan for generating a higher return, but in the case is they do not possess secured future investments can they must definitely select defined benefit plan.

The territory employees must keep in mind that the money they have saved for future can be wrinkled by the inflation factor (Csiszar, 2014). This is the reason they want to ensure that the retirement process they have selected should offer them the best chances for facing the inflation factor. In this part, it is explained as an advantage plan which the employees should ensure, that offering the return will become proficient in mitigating opportunity inflation factor (Howard and Yazdipour, 2015). The investment plans are critically designed by taking into consideration the risk and the inflation factors. Hence the employees of the tertiary sector must select the alternative which provides a better outpacing of the risk factor of inflation along with the return on investment.

The time value of money is a key notion of making a decision in terms of investments, which that that is the availability of money ion present time is highly worthy as compared to the future times. It is predominantly based on the possible capacity of earning; It is argued by the principle that, money is eligible to gain interest and make increment in its value over time. Thus it possesses high worth at the present time. It is said that money must be investment immediately rather keeping it in a mere locker because investment will be more beneficial which can come in the form of higher returns or interest (Baker and Ricciardi, 2015). One more reason for making money investment is the changes in inflation which can make a reduction in the purchasing power of the same amount. Further, the time value of money plays an important role in selecting the investment plan. Making the investment of money rather than keeping it in hand, will help in making future savings thereby making financial future

Issues relating to the concept of the time value of money and other factors in this decision-making process

The theory of time value of money is very significant in most financial as well personal aspects and decisions. For instance, one has to decide between obtaining a lump from their retirement plan or payment stream payment in the near future (Gino and Mogilner, 2014). Within the business, one may be choosing if or if not to purchase new equipment which will enhance revenue in near times. These decisions are engaged with the comparison of present value and future value (Madura and Gill, 2016).

There are three main rationales in order to support the time value of money notion. Initially, an investment of money is to done to gain interest over time, providing it possible gaining capacity. Along with this, money can be subjected to inflation and taxes, which means that consuming all the worth of currency over time, while making it less worthy in future. Ultimately, there is the presence of uncertainty of not obtaining the real amount of money in near future, if the employees retain money at the current basis, there is no uncertainty of the same.

In order to get the best estimate of this risk is complex and thereby it is hard to make use of this in a clear and effective manner. Further, these three reasons are why present worth of money is valuable. These can be an investment to make higher returns in the form of interests.

However, this future money might be worn out by inflation and higher taxes.  In a situation where the future payment is outstanding, there is higher risk associated while obtaining it.  The time value of money and tax consideration is essential to be taken into account because cash in hand is highly worthy than the money assured in future (Gino and Mogilner, 2014). The cash in hand at a present time can be utilized for making the investment while earning interest, returns and capital gains from the same. An assured dollar in the future is comparatively not valuable than present money due to inflation.  The main principle of finance (investment money can gain in interest) retains that any amount of money is worth the earlier it is obtained. In the most understandable way, the time value of money, states that all the aspects being equal, it is best to hold money today instead of future.   

Present study depicts that there are two main types of retirement plans; denied benefit plan and investment choice plan. The study has thoroughly discussed both this plan; it can be said that both plans are different from each other, both possess its own benefits and risks. However, it is totally based on the employee whether they want to make a contribution to the Defined Benefit Plan or Investment Choice Plan by considering their retirement preferences. Moreover, the study shows the significance of TVM theory, its importance and its related issues while making financial decisions.

References

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