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Jaya:
Hello All!
Welcome back to Kairos, a financial planning podcast where we talk about doing the right thing at the right time. Jayalakshmi And we have Namratha joining in today’s episode.
Namratha:
Hello Jaya & everyone who’s listening in.
Jaya:
So – in this episode we are going to look at planning for the most important leg in our lifecycle. We know that retirement is looked upon differently by diff people – I have a friend Surya who has been looking forward to retiring from the day he started working, and another friend Ankit who never see himself stop working. But either way, retirement planning is an essential part of financial planning as we see.
Namratha:
Exactly! No matter what one envisioned professionally, it is indeed an important milestone. On the surface, retirement planning has not changed all that much over the years. You work, you save and then you retire.
Jaya:
Right, even for people who aspire to work would love to have financial independence as they age. I’ve been thinking about one of my family friends – Amrit who is 48, he sounded a bit terrified about retirement when we spoke the last time. He is an aggressive investor, meticulous in saving, but yet was not sure if he would be able to retire in the next 10 / 15 years?
So, my first question is how can one assess if they are retirement ready?
Namratha:
Retiring is sure a huge life event. It does not come with many do-overs. So, it’s important one gets it right the first time. Luckily, there are ways to prepare for retirement—to help ensure you are ready when the day comes. The first thing towards planning for retirement is to understand your current expenses and situation. Recording cashflow can help to figure how much one would need when they retire.
Jaya:
But do you think it is difficult to predict the living expense in the future?
Namratha:
It is difficult to predict precisely what your expenses will be later in your life. Hence, knowing what your lifestyle costs now is essential to determine whether you are financially ready to retire. Also, to know if your overall investments can sustain you through more years without income, you need to know how much money you expect to spend per year.
So, listing the predictable changes in expenses will help you plan for the early years of retirement. So, Amrit should start with preparing a worksheet entailing his revenue, expenses. Identifying the current position and analysing the cashflow will be the starting point to work towards understanding the progress.
Also, one should factor the life expectancy — the number of years an individual is likely to live. Besides, one has to estimate the rate of inflation through your working life and into retirement.
Jaya:
So, with all this math, it looks quite possible to come up with the future expense.
Also, post retirement we know that certain heads of expenses might come down like rental / school fees. Similarly, there are other heads where we need to keep a buffer.
Namratha:
Yes, there are. That’s why, having adequate medical reserve for post-retirement needs is crucial. Old age is riddled with medical emergencies. Without adequate monies set aside for such times, it will be very tricky to manage the medical costs. You know that healthcare costs rise as you age. It is, thus, important to build a separate portfolio for medical expenses so that they do not eat into your retirement savings.
Prudent retirement planning entails building a large corpus for various daily needs as well as planning for medical exigencies. Adding health insurance to one’s retirement portfolio is an intelligent decision that pays rich dividends in the long run.
Also, if there few years to retire then there is an opportunity to increase the savings between now and the actual retirement date through catch-up retirement contributions. Any extra income or incremental income received can be used to build the corpus.
Jaya:
That’s a really great way of putting it, Amrit’s another major fear was what if he outlives his savings?
Namratha:
That is a very valid question. Amrit should ensure reviewing the assets periodically. Understanding future needs and taking stock of current finances should definitely help.
Apart from the size of the portfolio, allocation of portfolio is equally important to measure the retirement readiness. Risk capacity changes across stages of life and it is important to keep adjusting the investments accordingly. You mentioned saying Amrit is an aggressive investor, he should ensure that he maintains a balanced asset allocation and he might take a conservative call as he gets close to retirement. Taking a holistic view of assets is the key.
Jaya:
Absolutely. Talking about reviewing the portfolio, one of the worries which were eating up Amrit was whether his investments would be enough for retirement. How to gain that confidence?
Namratha:
That is the worry most of us have. Due to the pandemic, there has been so much turbulence in the stock market globally. But while it is very little you can do about the economy; you can take steps gradually to give your investments the best chance of performing over the long term.
First, understand your asset allocation. This plays a significant role in how your portfolio will perform. It also depends on your age and risk tolerance; you will want a different composition for your portfolio. Like I mentioned before, changing the composition will allow for enhanced growth and minimize risk.
Jaya:
This means that investing for retirement has to be very effective and planned. Your thoughts?
Namratha:
Completely agree. Retirement corpus should be combination of keeping a check of various angles. It should help keep tax liability at bay and provide a regular stream of income is of prime importance. Capital preservation is more important in the retirement age. Yet, some part of the portfolio should invest in growth stocks to cover the inflation during retirement.
Building a retirement portfolio with a mix of fixed income and market-linked investments is required.
You can stand to benefit from building a portfolio with a strong asset mix.
Jaya:
You are right, these are really helpful which I feel I should share with Amrit.
Before we close, could you please outline quick steps one should ensure before making the “big decision”.
Namratha:
Of course! It is neither too early nor too late to start planning for one’s retirement. Planning at a later stage can also help, if these little but important points are kept in mind.
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- Deciding the timeline for retirement.
- Take stock of where one stands – in terms of analysing the cashflows and in terms of the assets. This helps to plan future investments effectively.
- Get rid of any debts well before retirement.
- Plan and provide for other financial goals simultaneously.
- Understanding the risk appetite, i.e., for someone like Amrit, an aggressive investor can make choices of investing in volatile instruments and make most out of it, though its risky. While conservative investor needs to plan efficiently to ensure capital protection. Either way going with a balanced approach helps.
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It really helps to get a professional guidance to plan carefully so that you make the right decision.
Jaya:
Thank you, Namratha. This gives a broad idea on how one should start prepping for retirement. I’m sure this was helpful. if you are someone who is thinking of retiring sooner or later, do get in touch with us. Thank you for tuning in. We will see you around next month