Step-By-Step Approach To Retirement Planning
29 Dec 2021
Time is money is something we have all heard before especially when it comes to the merits of getting an early start on retirement planning. In practice though, most of us never start until later in life. Many procrastinate, while some are prevented by circumstances to plan early. With life expectancy increasing and nuclear families replacing the traditional family structure, those headed for a retirement have a lot to worry about.
We all know that retirement is inevitable. In some economies globally, retirement planning is considered a state responsibility as much as it is an individual’s like the 401K plan in the U.S.. In India, however, it has become the sole responsibility of working individuals. So, there is a massive need for higher conversation and awareness regarding the need for retirement planning.
Are you among the late-planners, nearing 50 years of age and worrying if it’s too late to catch the proverbial bus? Let me assuage your concerns – while it is a matter of worry, it isn’t a lost cause. With meticulous planning, you can make an adequate corpus for your golden years.
Review Your Current Financial Situation
Let’s cover the basics first. While you may have about 10 working years left, you will need to seriously review your current state of finances and then decide on the next steps.
Here’s what you need to evaluate:
Take an Objective Look at Your Finances and Make Adjustments Where Necessary
The first step is an obvious one. Take a forensic look at your finances by laying out your income, liabilities, other expenses, and future responsibilities, if any. This will give you a good overview of where you are draining your money, and help you identify avenues to save by weeding out unnecessary expenses. This will free up some cash to kickstart your savings.
Clear Your Debts
Considering you are nearing 50, it is highly likely that you either have negligible debt or are nearing a debt-free life. It is critical that you have no significant debt when nearing your retirement years, as it could pose a huge burden once you stop earning a regular income. The biggest loan likely to pinch your pockets is a mortgage on your house. Ensure that you have paid off such sizable debt by the time you are retired.
Get an Overview of Existing Assets
Most individuals typically do have some savings in the form of fixed deposits, endowment policies or mutual fund investments. Go through your existing assets to understand what your existing financial corpus looks like.
Check What Your Employer-supported Assets Are
Considering you will be working for at least the next 10 odd years before retiring, look at how much EPF you have saved up and if you are eligible for gratuity. These funds will go a long way in creating your savings.
Once you have a reasonable understanding of what your current state of finances is, it is time to start planning your retirement. While it is natural to panic, there is always a silver lining. Considering you have been working for 20-25 years now, you are likely earning a sizable salary every year as opposed to your early working years.
Your debt is also likely to be negligible, meaning income consumption is probably on the lower side. Since you have about 10 years to plan, the power of compounding is not yet completely lost.
Aspects You Need to Change to Plan Your Retirement
The next step now is to define your goals and identify unavoidable expenses you will incur in your retirement years.
Set Realistic Goals
Acknowledge the problem that you started planning late. This will help you stay grounded and make realistic financial goals for yourself. If you have fewer savings at 50 years of age, you can no longer aspire to live a lavish lifestyle in your retirement years. You will have to be more realistic and first think about your day-to-day needs and ensure that you have enough money to address those. The exercise you undertook to create an overview of your current financial state will guide you in this step.
Cap Avoidable Expenses
In your non-working years, you will be met with primarily 2 major expenses. With growing age, certain medical concerns may erupt and therefore you need to make financial provisions for healthcare. Similarly, the monthly utilities like groceries and other living expenses will continue for your lifetime, so you must take those needs into account too. There could also be some unforeseen emergencies and being cash-strapped at a time like that may incite panic.
Monitor Your Lifestyle
Another important factor to consider here is your lifestyle. While the older generation had a conservation mindset, progressive generations have been more inclined towards consumption mindset. Your consumption habits will be difficult to change, whether you are earning an income or not.
Grow Your Money For Retirement
Equipped with an understanding of your financial needs, here is how you can grow your money in the remaining tenure of your professional life:
Evaluate If You Adequately Protected
As mentioned before, with age comes the burden of deteriorating health. So, there is a high possibility that you will incur medical expenses during your non-working years. Opting for a comprehensive health insurance plan that covers a range of illnesses and ailments is a great way to start.
Health insurance provides a financial cover against expenses that arise because of medical emergencies. The cost of healthcare is already quite high, and in the years to come, experts estimate that it will only rise. Even routine treatments can be a drain on your pocket and one can only imagine what care for a critical illness would cost. Not having a health plan will cut into your savings and dent the financial provisions you have made for your retirement.
It is ideal to take a look at your family history and objectively identify health issues that you could be susceptible to. This will guide you when you are considering buying a health plan. One disadvantage of buying insurance in your latter years is that you may be required to pay higher premiums. However, don’t let this discourage you from getting the medical coverage you need. In the quest to avoid a higher premium today, you may end up losing your entire retirement corpus tomorrow owing to a medical expense. It is important that you aren’t penny smart and pound foolish.
Create an Income Stream for Monetary Stability
Among the chief priorities in your non-working years will be to have enough funds for your day-to-day living expenses. Whether you are working or not, you will continue to need a steady income. Here’s where insurance solutions can come in handy.
Income solutions make for ideal income replacement tools and go a long way in facilitating financial continuity once you have stopped working. There are now products available in the market that offer multiple options, wherein you can provide for specific time durations – short or longer term. These income solutions can give you a monthly payout and let you maintain a healthy income stream at least for some years into retirement. Similarly, annuity plans can also help create a steady income source for your non-working years.
Annuities are pension plans that pay a fixed amount of money at predetermined intervals—monthly, quarterly, half-yearly or annual. The key advantages of these plans are that they provide an assured payout for the rest of your life. However, one must remember that these products offer relatively lower returns as they aren’t risky assets like equities.
Start Because It’s Never too Late to Start
To summarize, what you need is a focused approach and prioritizing of your requirements. The step-by-step financial approach detailed above is an excellent way to start the journey for your retirement planning. Choosing the right products that suit your risk appetite is a critical component of this plan.
Sure, it is never too late to start planning your retirement. But, one cannot deny that an early start would have reaped far more benefits. With retirement aspirations of individuals now shifting, your goals for your non-working years are as important as those in your early years.
When you start earning your paycheck, spending money, and thinking of immediate concerns is tempting. However, it is extremely important to think about the long term as a sizable financial corpus during your lifetime is spent on the long-term goals.
There are several financial products available in the market that can help you plan your retirement years with ease and flexibility if you start early. Moreover, the compounding effect your money will experience when invested for a longer period of time will certainly reap rich dividends later in life.