Essential things to do before you retire

Mr Sanjeev Sharma, 50, is working as head of operations in a leading auto ancillary company. Sanjeev has been a conservative investor but most of his savings were consumed either in down payment of the house or for daughter’s wedding.

Sanjeev’s take-home salary is Rs 30 lakhs and his annual expense includes Rs 12 lakhs living expense and Rs 9.25 lakhs home EMI. The EMIs will continue for another ten years and the current home loan outstanding is Rs 58 lakhs. Other than employer’s health coverage, Sanjeev also maintains a personal health plan for his family.

Although Sanjeev expects to receive Rs 2.5 crores from the provident fund at the time of retirement but he is worried, whether that is enough funds to retire at 60.

Just like Sanjeev, if you are also worried about your retirement, you can do a few things so that your retired life is more comfortable and enjoyable.

Protect your emergency fund

Emergency expenses can happen any time. However, the possibility goes up, as you grow older. The emergency reserve must increase year on year, based on the inflation and change in your expense levels. Sanjeev must always maintain six months of his living expenses for the emergency.

Payoff all your loans

If you are taking a housing loan, personal loan, car loan or any other loan make sure that you repay them on or before your retirement. You need to choose the term of the loan in accordance with your retirement age. You can truly enjoy your retired life when you have 100 per cent financial freedom, not when you have to repay your loans.

Sanjeev has an outstanding home loan of Rs 58 lakhs. The home loan will be paid off before he retires but in case he has additional income say an annual bonus, he can partially reduce the home loan.

Understand your retirement needs

You need to visualize your retired life well in advance and need to create a budget for your retirement. Most of the people start to plan for their retirement when they are close to their retirement age. Often it is too late to have a structured approach to creating appropriate fund before you retire.

You can always consult a professional financial advisor who can set realistic expectations and create a right asset allocation for your retirement fund. However, here is a simple formula to know your retirement corpus.

Current annual living expenses X years of retirement.

Assuming, Sanjeev’s life expectancy to be 85 years, retirement corpus at 60 would be Rs 12 lakhs X (85-60) = Rs 3 crores.

Rs 2.5 crores will be available through the provident fund and that will leave a deficit of Rs 50 lakhs. Sanjeev maybe required to invest Rs 3 lakh annually for the next ten years to cover the deficit.

Examine your cash flow

Assess your cash flow situation and consider any income that will continue post your retirement such rent, interest income, etc. You must realign your existing policy and other investments in sync with your retirement age.

Sanjeev has a cash surplus of Rs 5.75 lakhs after meeting living expenses, home EMI and retirement savings. An additional saving of this amount can create further retirement cushion.

Consider inflation withdrawal strategy

When someone retires, the bulk of payout is made through an employer. In case you have not created a plan for withdrawal you can either commit your funds to wrong investment channels or park in an extremely safe option that does not cover your retirement life. One simple rule is to spread your retirement savings across various vehicles and then strategize with withdrawal strategy to ensure continuity, stability and tax-efficiency.

The monthly income you need when you retire is not going to be the same even after 5 years of your retirement. Inflation will increase your retirement expenses year after year. Therefore, your retirement portfolio should grow more than the inflation.

Sanjeev expects Rs 2.5 crores from his employer’s provident fund in ten years. Careful due-diligence of investment vehicle well in advance can reduce Sanjeev’s tax during his retired life.

Get sufficient healthcare coverage

The moment you retire, your employer will stop covering you under the group medi-claim. Therefore, you need to plan for your individual medical cover. If you have not planned it properly then all your retirement plans can go haywire.

Sanjeev must continue to maintain his personal healthcare plan and if required, evaluate super top-up plan to increase coverage.

Appropriate action by Sanjeev can ensure his peaceful retirement.

Do not put off today what you cannot afford to do tomorrow. Understand your retirement goals and structure your current investments so that you can retire comfortably.

Why is it hard to save money ?

Why is it hard to save money?

The decision to save or not to save is always a personal choice. Everyone’s financial situation is different, and therefore not everyone is able to allocate the same percentage of his or her income towards savings. However, everyone should be saving money (even a small amount) on a regular basis.

Here are some of the reasons clients often tell us ‘why they cannot/or they think they do not need to save’.

There is always something in the market that needs to be bought.

You can always enjoy a better television or a newer car, but splurging on the latest models can be expensive and often unnecessary. We often see young professionals frequently upgrading their cell phones and that too on EMIs. Everyone wants the latest iPhone!

However, is it in your best financial interest?

Let’s live today and leave the worries for tomorrow.

This is probably the most common reason why people choose not to save money, and it is also probably the biggest financial mistake that anyone could make. Just because you have other financial priorities, such as travelling or buying new gadgets, doesn’t mean that you can’t save money for your future at the same time. The longer you wait to start saving, the more you will need to save.

I am young right now. I can start later.

This is another huge financial mistake, which a lot of youngsters make. Procrastination can be very costly.

For example, if you save Rs 5000 per month for 20 years at an interest rate of 15% p.a, you will accumulate ~Rs 75 lacs by the end of 20th year.

If you chose to start saving later and say you save for only 15 years instead, you will only accumulate ~Rs 33 Lacs. This is the power of compound interest which early savers and investors enjoy.

I will anyways leave everything when I die-So why bother with saving?

This is true, but no one can predict when he or she will die. If you don’t have sufficient savings to take care of your financial needs in your old age, you will have to depend on others (Would you want to be dependent on your kids!). You may or may not be able to lead a life of your choice.

I am too young to start thinking about retirement

If you have more years to grow your money, lesser is the amount you need to save.

For example, someone who is 45 years and wants to accumulate Rs 6 crores for his retirement (age 60 years) needs to save Rs 90,000 per month. Total investment during the 15-year horizon will be Rs 1.71 Crores. However, a 25-year-old has to save only Rs 4,000 per month to accumulate the same amount upon his/her retirement (age 60 years).

Get into the habit of saving as early as you can.

How can you plan for your retirement

There are many things you must do before your retirement. But there are few essential things that you must do before you Retire

Do not put off today what you cannot afford to do tomorrow. In India, you have to create your pension and the government has a minimal role to play in securing your retirement. Here are a few tips on things to do before you retire so that your retired life is more comfortable and enjoyable.

Payoff all your loans 

If you are taking a housing loan, personal loan, car loan or any other loan make sure that you repay them on or before your retirement. You need to choose the term of the loan in accordance with your retirement age. You can truly enjoy your retired life when you have 100 percent financial freedom, not when you have to repay your loans.

Protect your emergency fund

Emergency expenses can happen any time. But the possibility goes up as we grow older. So we need to enhance the emergency reserve year on year, based on the inflation and change in your expense levels. Also, you need to invest back in your emergency fund in case you have withdrawn out of the emergency fund to meet any other expense.

Establish a retirement budget

You need to visualize your retired life well in advance and need to create a budget for your retirement. E.g. You will not be going to an office so expenses on transport and clothes may come down. Also, you will have more time to spend. You may need to spend more on leisure travel and health care.

Examine your cash flow

Assess your cash flow situation and consider any income that will continue post your retirement such rent, interest income, etc. Will there be any unwanted outflow during your retired life? Like paying life insurance, or SIP. You must also realign your existing policy and other investments in sync with your retirement age.

Grow your retirement corpus

Most of the people start to plan for their retirement when they are close to their retirement age. Often its too late to have a structured approach to creating appropriate fund before you retire. Here is a tool that can help you understand how much you need to lead a comfortable life before you retire. A professional financial planner can help you determine the right asset allocation to achieve the required corpus.

Develop a withdrawal strategy

This is one of the toughest aspects any retiree has to deal with. When someone retires bulk of payout is made through an employer. In case you have not created a plan for withdrawal you can either commit your funds to wrong investment channels or park in an extremely safe option that does not cover your retirement life. One simple rule is to spread your retirement savings across various vehicles and then strategize with withdrawal strategy to ensure continuity, stability and tax-efficiency. 

Minimize taxes

Careful selection of investment vehicle can reduce your tax during the retired life. Investing in PF and PPF can help to grow your investments on a tax-efficient basis. However, the growth is limited to these investments. Therefore, you need to add growth assets such as equity and real estate. Until recently, equity investment was tax-free but now with the re-introduction of LTCG, you have to pay 10% on long-term capital gains. However, even considering LTCG, investing in equity is important for your portfolio to beat inflation. 

Get sufficient mediclaim coverage

The moment you retire, your employer will stop covering you under the group mediclaim. So you need to plan for your individual medical cover well in advance. At old age, the medical expenses are inevitable and will only increase. If you have not planned it properly then all your retirement plans can go haywire.

Consider inflation adjusted pension plans

The monthly income you need when you retire is not going to be the same even after 5 years of your retirement. Inflation will increase your retirement expenses year after year. Therefore, your retirement portfolio should grow more than the inflation. 

Oversee estate planning

How your fixed assets and financial assets need to be distributed to your legal heirs? Create a Will. You can avoid creating relationship problems to your next generation because of your left out wealth.

Unless you are aware of what and how much you need for your retirement goals, your current investments will probably not be enough.