5 Stages of a Retirement Plan

“I’ve retired with a corpus of X amount. Can you refer a good financial advisor for giving me a retirement plan?” calls a friend from days of yore.

Retirement plan? It should have started long ago. Anyway, I do the needful. Three months later, she has still not contacted the financial planner. I check back with her.

“Oh, yeah… I need to take stock of everything I own before I approach a planner. As of now, I’m comfortable with ….”

This conversation was happening amidst the lockdown imposed last year. I like her confidence, that nothing can ever go wrong. If she does not have a total picture of her assets, how does the family know?

Estate planning is a topic to be dealt with separately, but there was a lot of risk in this situation.

When does retirement planning start, and what stages does it go through?

STAGES OF A RETIREMENT PLAN

1. SAVING

Needless to repeat, retirement planning should ideally start the day you start earning. Sounds far-fetched? You don’t know when those career breaks, sabbaticals, job loss, retrenchment or layoffs can happen. Some breaks may be your own decision, but you do need money to fall back on.

When I ask new hires about their savings plan, they talk about saving for a car, house, wedding or something similar. Saving for retirement is not on the agenda. It’s considered too early.

Micro-investing is the way to go, when income is small. It inculcates a habit.

2. INVESTING

It is the key to a good retirement plan. Only saving money and stacking it up in low-interest yielding bank accounts may not help.

We talk about power of compounding in the same breath as investments. I keep telling those new hires, power of compounding will not work if you keep withdrawing money in between. A retirement fund is something that is not to be touched.

Provide for all other financial goals and an emergency fund separately.

Consult a good financial advisor in the early stages. They will give you a comprehensive overview.

Check your Financial Quotient here

3. CONSERVING

We need to think about three factors here 

  • Market Risk
  • Fraud and cybersecurity risk
  • Sufficient insurance to cover risk

The final picture of your retirement goals can be very different if money is not consciously conserved.

The level of churn in portfolios is a subjective matter. If you are not an expert, hire an expert or invest in a mutual fund.

4. BUILDING A MONTHLY INCOME

Congratulations, you’ve retired and are entering a new phase of life. It feels strange to be only spending, and not earning. But that is the reality of life now.

Take care to provide for inflation. You are looking at 25-30 years ahead, if you retire at 60. The time span is longer if you have retired early.

There is a thumb rules of 30:30:30:10. 

  • Use only 30% of the total corpus to build a monthly income.
  • Next 30% should be reserved to provide for future inflationary cost of living.
  • 30% can be reserved as a legacy for your survivors, though this is optional. Feel free to use it if needed.
  • 10% is your emergency fund. While calculating cost of living, we often do not take replacement costs into account. Gadgets will break down. Homes need repair and renovation. You won’t be allowed to use old cars beyond a certain time.

5. WITHDRAWING FROM THE CORPUS

Americans plan for a life of 99 years, and recommend withdrawal of 4% every year from the main corpus. Increased life spans have brought down the figure to 3% p.a.

The percentage can be calculated to suit your individual circumstances. However, feel free to start withdrawing beyond the age of 75 or 80.

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