10 retirement planning principles that can get the most out of your accumulated corpus
Posted by: Uma Shashikant on Feb 26, 2018, 06.30 AM IST
Sudhir will retire in a month’s time. After 38 years of working in six different companies, he has accumulated a sizable provident fund, owns a good portfolio of assets and feels proud of his achievements. However, he is not confident about managing his money after retirement. What are the principles that can help?
he should gather his assets mentally and identify the use he has in mind for each one of them. It is easy to feel happy about three houses, a plot and sizeable deposits. But if Sudhir’s retirement plan involves travelling the world, these assets may not be of much use. He can’t sell the flat to fund a European holiday.
the assets should be broadly classified into three boxes: assets that will be needed for immediate and routine use, assets that will be used later and when needed, and assets that will be bequeathed to heirs or given away. For example, the house he lives in and also owns, is very likely to be inherited by his children. If that forms nearly 50% of his wealth, the rest of the assets in the bank and investments need not also be bequeathed. Around 30% for current use, 30% for future growth, 30% for giving away and 10% for emergencies is an example of such allocation.
he should determine how much income he will need routinely. The essential costs of food, fuel, utility and such are the core expenses needed regularly. His assets must generate that amount easily and leave a surplus for other expenses. He should be able to earmark these assets and invest them to generate the income he needs. It can be rent from a property; interest from deposits; income from a second career; or systematic withdrawal from a balanced mutual fund. This arrangement has to be set up first.
assets that remain after funding the essential expenses should be invested such that they grow in value. It is important not to look at all assets as the same— they all need protection of value and they should all generate income. Such a view will stall the growth in their value and offer no protection from inflation as time rolls by. Assets that are not immediately needed should grow in value and be available for discretionary expenses on travel and such pleasures. Not drawn fully, but drawn as needed while the rest continues to grow.
assets that are marked for giving away can be in chunky and risky investments. An equity portfolio of shares or funds held for a long time need not be liquidated because one has retired. It can continue to grow and be useful to the heirs, who may be still earning and have better risk taking capabilities.
Property is usually tough to sell. There is an emotional attachment to such assets. It can be left behind for heirs to deal with as they wish, or sensibly sold and reinvested in easy to manage financial assets.
, the dilemma about how much to use and how much to keep is a tough one. If a retiree finds that he owns assets of say Rs 2 crore, it gives him a huge sense of satisfaction. However, planning a trip abroad that requires a spend of say Rs 15 lakh, ends up being a very tough decision. Is it too high? Or may be not?
A good thumb rule is to ensure that drawings out of the corpus is in low single digits. Say 3-4% annually. The rest of the money continues to grow, and has time to recoup. If large chunks are drawn too early there is no scope for the money to grow in value and offer protection in later years.
, the portion that is being used for routine expenses needs topping up as years roll and inflation takes a toll. The money from the growth segment that has been set aside should be transferred to the income segment, to keep regular life comfortable. Retirement planners call this technique laddering. A portion that is left to grow in value, comes in handy to top up a portion that generates income, say once in 7 to 10 years. That time frame is good enough for assets to grow in value.
, the asset portfolio as a whole needs maintenance and care, and retirement offers the time to do it. If there is a house that was acquired many years ago, and earns limited rent, it makes sense to sell and acquire a smaller but newer house that can offer better renting opportunity. Or such money can be deployed in financial assets. Decisions about assets should be made with heir earning and growth prospects.
, retirement is the time to make better choices about life, lifestyle and health. After years spent in stress and pressures of work, retirement offers the opportunity to focus on well being. Instead of fearing disease and expenses, focusing on good lifestyle habits and health can offer great benefits. Expenses on health and healthcare should be included in the annual budgeting exercise.
, Sudhir and many of us belong to the generation that does not want to depend on the children. But that does not mean keeping them out of our lives in a righteous manner than precludes them from doing things for us. They would be happy to chip in when there is an unexpected large expense, especially on healthcare. Graciously accepting that help is important.
Retirement can be easy if we take charge of our assets and deploy them to work for us. Many of us love the assets so much that we fail to use them in our lifetime. Sudhir has to be aware of this trap.
(The author is chairperson, Centre for Investment Education and Learning.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This article appeared in Economic Times dated Feb 26, 2018, 06.30 AM IST