Retirement planning is a life-long exercise. Ideally, it lasts from when we draw our first salary/income to when we (or the surviving spouse) draw our last breath. During this journey, there are several stages. Each stage teaches us something new. Here are some of these stages. This could vary from person to person. This listing is based on personal experience and interactions with readers.
Note: Not all investors will go through these steps. Factors like time left for retirement, the amount invested, salary growth, assets invested, change in expenditure, health and much more affect our retirement planning.
1. I have plenty of time to worry about retirement planning. Why worry now? This is when only mandatory or parent-influenced investments like EPF, PPF, and endowment policies are in place.
2. OMG! Why is the amount I need to invest so much? Why is the corpus required so much? Am I already done for? This is when we use a retirement calculator for the first time.
What we do after this will determine our financial security in retirement. Do we strive to invest what we can and see where it goes, or do we give up saying, if the glass is not full, I don’t want it? For inspiration, see: We lost sleep after using a retirement calculator! This is how we recovered.
This is also when investors appreciate the need for equity in the portfolio — the sooner the realization, the better off the retirement. Those with an inadequate corpus and insufficient time to increase equity must be ready to work longer.
3. I am doing what I can, and now I hope for the best. A sense of calm starts to build after a few years of systematic investing and increasing investment as much as possible each year. We are doing everything we can.
4. Retirement corpus = 3 times annual expenses (aka = 3X). That is the glimmer of hope we have been looking for. That gives us the faith. Maybe, just maybe, we can build a reasonable corpus (provided there is enough time to retire). More importantly, the motivation to invest systematically.
5 Retirement corpus = 5X. What do we have here? Now, the dreams kick in. When would this be 10X, 25X?
6 The confidence continues to build. We look at market risk differently. What seemed risky, like gambling, now seems like second nature.
7 Additional sources of income. With the basic arrangement to build the corpus in place and ticking along nicely, we start thinking about a retirement portfolio. Initial retirement calculations assume withdrawal from a single pot.
Passive, rental, and dividend income are all part of the mix. These are some related resources.
8 Risk-reduction: How long should I hold 50-60% equity? When should I start reducing it? How much equity should I hold after retirement? These are some of the questions that spring to mind at this stage. Creating a Retirement Portfolio: How to Determine the Right Equity Allocation.
9 Post-retirement strategies: Now, we pay attention to a retirement bucket strategy, the importance of a pension or income flooring and annuity laddering and how to combine them: Is it possible to combine a bucket strategy with income laddering after retirement?
Ideally, both 8 and 9 should be incorporated from day one of retirement planning to ensure we do not underestimate the amount required. This is implemented in the freefincal robo advisor tool.
10 Retirement corpus = 30X the threshold of financial independence, but it’s not quite there. The vicissitudes of the market and life teach us that simplistic notions of financial independence, like a 30X corpus, are far from enough.
We must tighten our retirement planning with zero or negative real returns (post-tax) after retirement. We must aim for a withdrawal rate less than 4%, preferably less than 3%. See: What should be my safe withdrawal rate for retirement?
11. Dreaming big: This is the time to aim higher. Can I hit a 100X corpus before retirement? Can I hold onto 60% equity all my life? Can I leave a legacy for my children? Can I build a platform with which my children can follow their passion?
12. Focus on how to spend time after retirement. Even if we do not need the money, gainful employment after retirement is essential for our health. So we must think about it and plan for it well. If we have a robust secondary income source, we may not have to dip into the corpus unless necessary! See, for example, How to build a second income source that will last a lifetime.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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