People usually underestimate how much they need and over-estimate how much they have. This blog post explains why this is more important while financial planning for retirement
IF RETIREMENT planning is crucial to providing you and your loved ones a secure future, the same holds true for post-retirement planning as well. Particularly if you don’t want to run out of money in the sunset years, even while maintaining a comfortable standard of living when you are no longer earning.
The ultra-high standards of living that people achieve today using credit cards and other types of credit are based on the assumption that they will have an unlimited future during which they’ll tighten their belts and pay all the borrowed money back. Unfortunately, people can’t carry this lifestyle into retirement unless they become rich, and that’s unlikely.
Post-retirement planning, thus, acquires added importance because people usually under-estimate how much they need and over-estimate how much they have. For instance, people assume that after paying out their housing and other mortgages, their monthly expenses will reduce over time, but they forget that healthcare expenses are bound to rise as they become older.
There are other complexities too. For example, people today generally live longer and spend more years in retirement. They, therefore, need to save as well as protect their savings, more to cover the risk of living longer than their life expectancy. Traditionally, retirees moved most of their assets into investments that provided a fixed income. But many of today’s retirees need to invest for growth as well as income, so that their assets will continue to support them long into the future.
Moreover, as people are healthier and love pursuing new interests even in golden years, such as vacationing abroad and playing golf, their post-retirement lifestyles are not bound to be less extravagant than those prior to retiring. Therefore, investors many a times are faced with the issue of looking beyond those financial plans which assume that one’s post-retirement expenses would always be lower. Also, there are issues concerning financial responsibilities in the event of disability or impairments and the eventual distribution of assets to beneficiaries.
Start here. You need to know how to plan for your post-retirement life. Post-retirement financial planning can be a continuation of retirement planning or an independent financial planning exercise in itself.
In the first case, one needs to review the plan immediately after retirement and thereafter regularly. Your post-retirement financial plan should begin with the basics: net worth, income and expenses. Analysing these three factors will help you determine how long your assets will last at various rates of investment return, inflation, and spending.
Post-retirement financial planning, however, is taken independently when one doesn’t have a retirement plan. However, while in the case of retirement planning the focus is on achieving growth, in post-retirement financial planning the focus is on generating income as well as achieving growth. Since the retiree depends on the income from investments, managing cash flows becomes paramount.
Three important criteria to be considered while choosing a post-retirement investment avenue are:
Since most retirees have a fixed corpus and earnings, safety of these becomes very important. But the rate of return that an investment offers is also important as retirees depend on these returns for their income and most retirees prefer to have easy-to-liquidate investments to meet the regular and unforeseen expenditures.
Post-retirement, a person does not have his monthly paycheck and will have to depend on the annuity he receives from his investment corpus. Therefore, this corpus is the most critical to his survival. Financial planning, therefore, has to be done in earlier stages of life so that the person will have adequate money to suit his lifestyle. This only changes the way he is going to manage his money.
Unfortunately, however, there are very few investment avenues available today which meet the three criteria of safety, rate of return and liquidity. Safe investments offer low returns or come with a ‘lock-in’. Higher returns, on the other hand, come with relatively higher risks. It is, therefore, important to allocate the corpus intelligently so that near-term needs can be met with low-return yielding liquid investments and part corpus can be invested in ‘lock-ins’ or riskier investments. Also, apart from the regular investment options such as post office deposits, senior citizen bonds and RBI bonds, there are some varieties of mutual funds — Liquid Plus Funds, Arbitrage Funds — which can be considered.
The amount of risk a person takes, however, should be based his profile. For instance, if there is a large gap between the returns needed and the returns earned, equity exposure might become a necessity. However, once invested, investments should be monitored regularly and action taken, if necessary.
Also, since post-retirement many people are left with no other choice but only to control their expenses, it would also help them a lot if instead of finding a huge nest egg, they could simply find a retirement lifestyle that fits their budget!
IF RETIREMENT planning is crucial to providing you and your loved ones a secure future, the same holds true for post-retirement planning as well. Particularly if you don’t want to run out of money in the sunset years, even while maintaining a comfortable standard of living when you are no longer earning.
The ultra-high standards of living that people achieve today using credit cards and other types of credit are based on the assumption that they will have an unlimited future during which they’ll tighten their belts and pay all the borrowed money back. Unfortunately, people can’t carry this lifestyle into retirement unless they become rich, and that’s unlikely.
Post-retirement planning, thus, acquires added importance because people usually under-estimate how much they need and over-estimate how much they have. For instance, people assume that after paying out their housing and other mortgages, their monthly expenses will reduce over time, but they forget that healthcare expenses are bound to rise as they become older.
There are other complexities too. For example, people today generally live longer and spend more years in retirement. They, therefore, need to save as well as protect their savings, more to cover the risk of living longer than their life expectancy. Traditionally, retirees moved most of their assets into investments that provided a fixed income. But many of today’s retirees need to invest for growth as well as income, so that their assets will continue to support them long into the future.
Moreover, as people are healthier and love pursuing new interests even in golden years, such as vacationing abroad and playing golf, their post-retirement lifestyles are not bound to be less extravagant than those prior to retiring. Therefore, investors many a times are faced with the issue of looking beyond those financial plans which assume that one’s post-retirement expenses would always be lower. Also, there are issues concerning financial responsibilities in the event of disability or impairments and the eventual distribution of assets to beneficiaries.
Start here. You need to know how to plan for your post-retirement life. Post-retirement financial planning can be a continuation of retirement planning or an independent financial planning exercise in itself.
In the first case, one needs to review the plan immediately after retirement and thereafter regularly. Your post-retirement financial plan should begin with the basics: net worth, income and expenses. Analysing these three factors will help you determine how long your assets will last at various rates of investment return, inflation, and spending.
Post-retirement financial planning, however, is taken independently when one doesn’t have a retirement plan. However, while in the case of retirement planning the focus is on achieving growth, in post-retirement financial planning the focus is on generating income as well as achieving growth. Since the retiree depends on the income from investments, managing cash flows becomes paramount.
Three important criteria to be considered while choosing a post-retirement investment avenue are:
- Safety,
- Rate of return and
- Liquidity.
Since most retirees have a fixed corpus and earnings, safety of these becomes very important. But the rate of return that an investment offers is also important as retirees depend on these returns for their income and most retirees prefer to have easy-to-liquidate investments to meet the regular and unforeseen expenditures.
Post-retirement, a person does not have his monthly paycheck and will have to depend on the annuity he receives from his investment corpus. Therefore, this corpus is the most critical to his survival. Financial planning, therefore, has to be done in earlier stages of life so that the person will have adequate money to suit his lifestyle. This only changes the way he is going to manage his money.
Unfortunately, however, there are very few investment avenues available today which meet the three criteria of safety, rate of return and liquidity. Safe investments offer low returns or come with a ‘lock-in’. Higher returns, on the other hand, come with relatively higher risks. It is, therefore, important to allocate the corpus intelligently so that near-term needs can be met with low-return yielding liquid investments and part corpus can be invested in ‘lock-ins’ or riskier investments. Also, apart from the regular investment options such as post office deposits, senior citizen bonds and RBI bonds, there are some varieties of mutual funds — Liquid Plus Funds, Arbitrage Funds — which can be considered.
The amount of risk a person takes, however, should be based his profile. For instance, if there is a large gap between the returns needed and the returns earned, equity exposure might become a necessity. However, once invested, investments should be monitored regularly and action taken, if necessary.
Also, since post-retirement many people are left with no other choice but only to control their expenses, it would also help them a lot if instead of finding a huge nest egg, they could simply find a retirement lifestyle that fits their budget!
