Planning Retirement - A practical approach and road map

*Four Wrong Retirement Assumptions*

Most of us work hard so that we can retire in a financially comfortable position. But interestingly, once we retire, it requires a tremendous shift in mindset, to move from aggressive saving, to eventually shift from savings to spending. Having said that, the entire exercise is based on a number of assumptions. Let's look at a few common ones.

*Assumption 1: Retirement is a destination*.: All along retirement has been viewed as a destination, as an end-of-the-road milestone. Nothing could be farther from the truth. The road could be long and winding as the journey keeps unfolding. Rather than a destination, it should be viewed as a transition. We should realize that the concept of retirement is undergoing a fundamental change. Seldom do people just stop work and start drawing a pension. Earlier, it was the case of being shoved off the demographic cliff and being forced to leave the company, saying goodbye to the 9-to-5 lifestyle. Today, the concept of retirement is being reconfigured, and it could be a phased retirement.

It could mean just slowing down and working 3 days a week, or, working 5 days a week but just for a few hours each day. It could be opting for just project-based work or going off the salaried payroll to that of a consultant. It could also be the conventional “giving up work” altogether to pursue your hobbies. Neither does it have to be at a particular age. You could be retiring way before the set mark, out of choice. Or may be, a golden handshake was offered, and you were asked to move on.

*Point to note:* Retirement is now a much looser definition. There is no right or wrong. There is no one-size-fits-all. But how you choose to interpret retirement is what will form the basis of your retirement plan. Have clarity on your plan so you can build on it.

*Assumption 2: I won't live for long.* Don’t be conservative when estimating your retirement period. We can’t know how long we’ll live. So as a foundation, use life expectancies. The expected length of your retirement should definitely be longer than your life expectancy, since you want a cushion should you live longer than average. So for a 65-year-old today in average health, keep a period of 25 years in mind. For a couple, both age 65 and in average health, I think the minimum period should be 30 years. If you are much younger, say age 25, you need to really pad up on life expectancy number because by the time you eventually retire, life expectancies will be even higher (something actuaries call expected improvement in mortality rates).

According to the latest Sample Registration Survey (SRS) of India, overall life expectancy at birth for women is 70.4 years and 67.8 years for men. But do remember, life expectancies are just an average. If you have not suffered from malnutrition (as the lower economic classes might) and are in excellent health, chances are you will live longer. Look at your family history. How long did your parents live? Be practical.

*Point to note*: Do remember, that if your money has to last for decades, you cannot have a retirement kitty that has zero exposure to equity. Your money has to grow to provide you with a kitty, and growth of the kitty during your retirement phase.

*Assumption 3: Retirement is stable*. Your entire “retirement phase” won’t be one dimensional. It will be packed with events and transitions into different life phases. At the start of your retirement, you may travel a lot. During another phase, you may deal with numerous health issues. There are six descriptive phases of retirement that represent a transitional process individuals go through when they permanently exit the workforce. While they do not apply to everyone, they do convey the message that to view retirement as one long life phase is rather naïve. It could be a short or very long stage, depending on the age you actually retire and your life span, but a multi-phase journey depending on your health, the health of your spouse, death in the family, the state of your finances, and so on and so forth.

*Point to note*: It would be very wise to avail of the services of a financial planner. Your retirement could easily last for a few decades, your money must last too. Also, you will have to figure out the withdrawal rate during the initial phase so that you have ample funds to keep you going. For instance, you cannot overdo the travel at the start and deplete your kitty.

*Assumption 4: My spouse will always manage the finances.* If you are married, be prepared for the eventuality that you might not be so for your entire life. Don’t plan on your spouse always being around. Unless you and your spouse pass away at the same time (which you don’t need to be told is very highly unlikely), one of you will experience being single at some point.

*Point to note*: Ensure that Wills are drawn up and nominees are in place. Also, don’t leave all the money management to one spouse; both must be active or at least very aware of the financial situation.

Having said that how do you go about?

*Saving For Retirement*

You should absolutely save up a nest egg for your retirement. But with all the downsides to relying on savings for your retirement, you need to take the passive income approach as well.

Your first step is to figure out how much money you need to have in passive income—money you receive REGULARLY and AUTOMATICALLY whether you’re working or not.

I will take you through each step of the process, and leave you with a space to add in your own personal costs. When you get to the bottom, the sheet will have calculated your unique financial freedom number.

You’ll need to know exactly how much is needed for you to keep a roof over your head.

1. If you have a mortgage, put your monthly EMI Rs............
2. Associated property taxes Rs.........
3. Repairs expenses for your house, if you own one Rs..........
4. If in a rented house downsized to an apartment in the future, your monthly rent payment Rs...........
5. Rental or homeowners insurance cost Rs.......
6. Utility expenses (electricity, gas, sewer, water, and trash) Rs............
7. Any subscription services, such as cable TV, phone services, and/or internet Rs.......
8. Home maintenance expenses (HOA dues, gardening service, housekeeping, etc) Rs...........
9. Monthly food budget, along with any monthly purchases for clothing, personal care items, and toiletries Rs........
10. If you have any left-over loans or credit cards, those won’t go away post retirement. EMIs on loan and credit payments Rs.........
11. Supporting any family member, add the monthly cost here Rs..........
12. While you can’t plan for any surprise medical expenses, you can plan around the ones you already have. Put the monthly cost of your medications, health insurance payments, and any other health supplies or supplements you take, along with your life insurance payments, if any, and the cost of any regular medical appointments Rs...........

With all your expenses at home accounted for, you’ll need to figure out your transportation costs.

13. If you’re still paying for your vehicle’s purchase, EMI amount Rs............
14. Monthly running fuel cost for your car Rs..........
15. Vehicle maintenance costs like routine serving and repairs Rs..........
16. Vehicle insurance Rs...........
17. Provision for any public transportation costs you may have as well Rs..........

To know more about Planning Retirement, kindly contact Jayant Harde on 9373284136 or +91 7122282029. You can also visit our website: www.jayantharde.com