Retirement Planning - Kaleem's Blog

Introduction

Hopefully, you are healthy and working in a job or doing a business. You are earning satisfactorily and generally, have enough for the month. You have some savings for rainy days as well. You are married and have growing kids with growing needs.

You don’t worry much about your routine expenses, although it’s tight. But when it comes to achieving your long-term financial goals e.g. buying a house, if you don’t have one, kids’ education and their marriage, etc, you don’t have a clear vision. You don’t feel as energetic as you used to, in your 30s and 40s. However, your routine expenditures are increasing and your major financial goals are approaching fast.

You often think about your retirement. Inevitably, you will have to call it quits one day. Probability suggests that you will live till well after you stop working.

Balancing all these conflicting requirements is what is called retirement planning.

What is Retirement?

The term “retirement” may mean different things in different situations. When a professional sportsperson stops playing competitive sports, it is called retirement. When an employee completes the tenure of service, that is also retirement. After this, he/ she may start working again.

On the contrary, however, from a personal finance perspective, retirement is different. It is when you stop working for money. It may happen at any age between 30 to 70. Interestingly, you might be working as well as retired at the same time. If the money you make from your work is not crucially needed for meeting your expenses, you have actually retired. It is because the money you already own has been put to work to earn more money which far exceeds your short-term and long-term cash requirements.

Some Guidelines for an Orderly Retirement

Starting early can be extremely powerful. Actually, the best time to start planning for your retirement is when you start working.
Having clear financial goals helps you retire early.
Refrain from accumulating bad debt. It is anathema to financial well-being.
While you work, your current self should pay a percentage of your earnings to your future self. That means saving is very important. If you start early, saving 10-20% of whatever you earn regularly, should be enough. Try to follow 50-30-20 formula, which means spending 50% on your needs, 30% on your wants, and saving 20% for your future.
Start thinking and planning to have multiple sources of income.
Saving can’t be an end in itself. It should lead to investment. Start making investment as early as possible.
Preferably, learn to invest yourself. It comes with experience. Don’t delegate this most important function of money to someone else. Investment should be goal-based instead of being open-ended.
View personal finance as family finance. Discuss it with your spouse and kids frequently and frankly.
It is better to divide financial responsibilities among all adult members of the family rather than being the sole breadwinner.
During family conversations, do some financial boundary-setting with your kids. Explain to them, explicitly, what you can and will do for them and what they will be expected to do for themselves.
Ideally, you should be responsible for your own and your spouse’s financial needs. Whereas, your kids should be at their own by a certain time in their life. It goes without saying that you will be there for them if they need your help.

Retirement Plan – A Suggested Outline

It is only a suggested plan and may be tweaked according to your situation and goals.
First, define your financial needs clearly. You may also list down your wants. Now build them both into your financial goals. Accord a higher priority to your needs. If it looks too ambitious, eliminate or water down some of your wants. Keep repeating this exercise until it looks realistic and achievable vis-a-vis the financial resources available at your disposal.
Size up your debt, if any. Make a plan to attack it. Start from the most expensive. It is pointless to make investments if you have debt piled up on you.
Whatever financial resources are available at your disposal, divide them into two parts i.e. income stream and wealth creation. While the income stream caters to your short-term recurring needs, wealth creation is meant for eventual financial freedom. Maintain correct balance between the two. Have a pre-defined emergency cash reserve at all times.
You may be owning a financial asset that is tailor-made for regular income e.g. pension. Given an option, don’t dismantle it, especially if your employer is not paying a good price.
Plan your wealth creation project deliberately and work on it diligently because this is what will enable you to achieve your big financial goals and also let you retire early.
Real estate and equity should be considered for wealth creation. My personal bias is towards equity, however, real estate is also a credible vehicle for wealth creation, if used appropriately.
The money you are going to need in the next 5 years should be in debt i.e. some fixed-income fund. This is apart from your regular income stream which you have already set in motion. This is actually the money you are going to need to fulfill a particular goal that is coming up e.g. your child’s marriage. This implies that, once every year, you should have a look at your financial plan and if a goal is falling in the next 5 years, you should sell that portion of your investment portfolio that was meant to fulfill that goal and park the money in a debt fund.
Keep your bigger financial goals in sharp focus e.g. buying a house, automobiles, children’s education, and marriage. Set realistic and achievable targets. Don’t stretch yourself beyond limits. If you do this, your retirement is going to be delayed significantly.
While making big financial decisions, clearly understand whether you are making a lifestyle choice or a prudent financial decision. Especially, it pertains to a house and children’s marriage. Make a balanced decision.
Adjust your allocation of funds for various financial goals for inflation every year. For example, if you need one lac for a particular goal this year, at a 7% rate of inflation, you will need 1.7 lac next year for the same goal.
Buy life and health insurance according to your needs. File your tax return regularly. Do it yourself or hire a professional.
Have approximately 20% additional funds for contingencies and emergencies.
Make sure that your name and other details like your father’s name, date of birth, etc are exactly the same on all documents e.g. your bank accounts, your investments, and others. These details should be the same as on your national identity document. It applies to your spouse as well.
Organize all your important documents, hard and soft copies, and keep them in a safe place known to your family members. This should include your IDs/ passwords, bank accounts, credit card details, investment portfolio details, etc.
Have your will written and placed with your documents.

Conclusion

Retirement planning is a sub-heading of your overall financial plan. Early retirement is a desirable financial goal and must be pursued. Work becomes joyful if you don’t have to work for money. Starting early can be very helpful. Another important aspect is to have realistic and achievable financial goals. Having correct knowledge of various investment options will also be useful. Having taken care of your financial obligations well in time will have a very positive impact on your health and quality of life.

How did you find this article? Please comment. Also give suggestions, if any.

My other articles, you may find useful are:

How to Make a Personal Financial Plan – Basic Considerations

Personal Finance – A Suggested Checklist

Investment vs Speculation

A Brief History of Money

Why I Started a Blog on Personal Finance

Anatomy of Financial Risk

Debt, Equity, and Real Estate: An Overview

How to Compare Equity and Real Estate as Investment Options

How Stock Market Works and How to Work in Stock Market?

Benefits and Challenges of Using a Credit Card