Over the years people have become better at planning for extremes and sudden occurrences of cash flow disruptions such as unexpected illness, accidental death, or job loss, but surprisingly, they are not at all prepared for more realistic, longer term eventualities such as retirement.
The world is in a dire dilemma between whether they want to retire early and those who despise the thought of a life without going to office.
You retire from your work but not from your life. And may have a different set of dreams in your post retirement life. At the same time, you may also want to maintain your day-to-day lifestyle without worrying about your expenses.
While charting out a solid retirement plan below are the key factors that one can consider however the list is not limited just here and may have other facets involved:
Financial Requirements
1. Survival expenses: You will need to have a fair degree of clarity as to what kind of money you would need if you retired today and wish to maintain a certain lifestyle.
2. Reserve for dependants: You will have to create ample amount of reserves for your dependants
3. Wish list: Taking into consideration your preferences you will have to make wish list of experiences and luxury you want to have in retirement days.
Time frame
1. The Start: One needs to have a target-tentative timeline to have a reasonably strong financial fortress.
2. Life Expectancy: For how long would one need access to money from the financial pool. This is majorly decided basis life expectancy. It is advisable to presume a long healthy life.
3. Period: Decide if regular income is required at pre-defined intervals – frequency would be monthly, quarterly or any similar frequency.
Other requirements
1. Rising Inflation: Inflation can eat up your savings and hamper your financial needs. Inflation should be the basic underlying principle on which a financial plan needs to made.
2. Emergency corpus: Emergency fund is a kind of fund which comes in handy during uncertain times or whenever a state of financial emergency strikes.
3. Other income sources: Expectations of sources of income is a critical part of retirement planning. This income can be in the form of rental income, pension or anything similar.
Creating a retirement plan
1. Corpus: To begin with, figure the corpus you need to invest periodically to achieve the required corpus at retirement plan. This might be amount you have computed basis financial requirements, time frame and other requirements.
2. Asset Allocation: Once you arrive at the corpus when you retire, you must decide on your asset allocation. There might be a mix of asset class such as equities, fixed income and gold. One can be overweight on equities in the initial stages of life and have minor allocation to fixed income and gold.
You can reduce equity exposure by 10% for every five years lesser than the base twenty five years and replace it with fixed income and gold, without letting gold comprise more than 10% of the portfolio at any given point in time. As example, for twenty five years to retirement, equity can compromise and other asset class can take charge.
3. Picking categories: After deciding your asset allocation it is important to choose the right categories within different asset classes. Within equities let’s say large cap-oriented funds are slightly stable as compared to mid and small caps. However, one can take incremental risk basis how far you are from retirement. Within fixed income, one can look at accruals or interest rate-based strategies.
4. Managing allocations: A move towards retirement means a move towards safety. Start chopping off riskier and volatile asset from the retirement plan.
5. Revesting cash flow requisites: Once at retirement target, you must revisit the frequency at which you will require cash flows and start Systematic Withdrawal Plan (SWP) at desired frequencies.
6. Keep watch: Keep watch on your withdrawals and maintain the flow. If you notice the withdrawals hasten, you may have to reconsider your personal income and expenditure patterns to ensure a longer term cash flows. Any windfall gain can be added to this portfolio as margin of safety.
Above mentioned points cover a broader framework for your retirement planning and might change from person to person. It is highly advisable to consult a financial advisor and ensure you are on the right path to your required goals.
