How to plan your retirement: 5 mistakes to avoid if you want an easy retired life

view original post

Is there a summary of ideas for retirement planning? This question has been asked too often, and there are so many aspects that have been discussed here several times. Since personal finance is not easy to generalise and does not offer rules for everyone, here is another attempt. Retirement can be sternly described as a phase when there is no income. Lucky are those who have a pension that is linked to the inflation index and grows decently. However, a growing number of people have to fend for themselves. Let’s divide the retirement planning into roughly three phases.

The first is the 40-60-year phase. We begin to worry about retirement and, hopefully, have adequate income, with good savings and investments, by then. The primary task in this phase is corpus accumulation. Do not compromise on the size of corpus. Save more. Invest aggressively. Don’t sweat over safety and income when you need growth and appreciation. Equity investing is your key to capital appreciation. Maximise your equity exposure in the NPS; have SIPs in diversified mutual funds; invest in index funds. Grow the corpus and make it big. Don’t worry about how much is enough and save to the best of your abilities. An amount 30 times your annual spend is a good thumb rule.

Mistakes to avoid: First, investing in property and hoping that the rent will help your retirement is a big mistake. Managing an old property when you have aged is tough. Maintenance will add significant costs and rental yields will be low. You will leave behind a chunky asset that you haven’t used.

Second, investing in fixed income products and choosing conservative investment options with your corpus. Your salary is your income and you don’t need more. You need growth. Don’t shortchange your corpus. Invest in equity and allow it to grow and appreciate in value. Choose funds and index over stock trading. The second is the 60-75-year phase. You are not going to use all your corpus at one go, nor should you plan to leave it untouched for your heirs. Besides, you have assets of various kinds, including house(s) and gold. Consolidate these and decide how much you plan to use, and what you want to leave behind. Be kind to yourself.

In retirement, you don’t have to match the income; you have to match your preretirement spend so that you are comfortable. Lifestyle compromises make no one happy. What you need from your corpus, and assets, is a small, single-digit drawing. This should ideally be not more than 4-6% of your corpus each year. A small percentage will keep you in peace. However, the math is complicated by inflation. Your post-retirement corpus must also grow in value, so that you can keep drawing without depleting it. To draw, you must grow. Invest a small portion in equity or growth assets. Mentally earmark these for bequest so that you don’t worry about risks. The portion you draw and use is the one that must generate income. Invest it conservatively for a regular income. Periodically, move money from the untouched, appreciating equity growth bucket into the regular use, stable fixed income bucket.

Mistakes to avoid: First, thinking that the corpus must remain untouched and subject to no risk. This one mistake has killed the quality of life of many retired investors. This is true only if you want to leave the entire corpus as bequest. Use what you have earned and saved for yourself. Bequest is the residual balance.

Second, assuming that fixed income from the corpus is adequate, and later finding that inflation hits hard. Without transfers from the growth portion, a fixed corpus will deplete. If you have the energy and ability to earn an income, do it for as long as you can, especially if your corpus was small because you saved less and invested conservatively. Don’t give up on earning an income too soon and too easily.

Third, investing the entire corpus conservatively out of fear. Interest rates run with inflation and are mostly lower than inflation rates for your specific basket of consumption. Let one portion appreciate and support you in fighting inflation. Investing 30% in equity is a good thumb rule.

The third is the 75-year plus phase. Many of us should plan for living beyond this age. Nothing is lost if we don’t, but if we live longer without resources, we will suffer. Focus on consolidating, simplifying and planning for bequest. Do not leave behind assets that are tough to transfer and manage. Sell off old properties and release the locked funds. You may not be able to use them now, but make it easy to pass on.

Simplify your life so you don’t have to manage too many assets, accounts and paperwork. Consolidate your investments and keep these easy to manage. One bank account, one demat account, and a few mutual fund folios is all you need. Make it two accounts if you must, but close all others. Take a decision on how your health care costs will be met. Decide how you will use your assets in your lifetime and make a will to pass these on. Complete all paperwork with respect to nominations and joint holdings. Keep it simple.

Retirement planning invokes so many fears about the unknown. The natural response is to forecast, plan and control, but these responses can also increase anxieties and worries. What matters is not how well you forecast the future, but how you act when a problem presents itself. We cannot waste life preparing to fight unknown problems. However, we can prepare to respond when an event occurs, if we have flexibility of resources, time and energy. Keep your money working, accessible and easily deployable.

This will win over detailed worksheets to forecast and formulae to control. The biggest bugbear in retirement is regret. As one mulls over life’s past, nostalgia feels so comforting, and regret, so searing. It is never too late to learn the art of living in the present. When there are no major external problems, looking inward might offer answers. You have all the time to work on the person that is you. Don’t focus on others and your expectations for them.

Kabir Das beautifully says: ‘All these years I kept making the same mistake; the dirt was on my face and I kept wiping the mirror.’ Retirement is to become a better person. Look beyond money; a lot that matters might lie there.

(The author is CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING.)