Financial Planning Strategies For Everyone - III : Retirement And Beyond
In the final part of my series on financial planning strategies for everyone, we will look at strategies for retirees. Retirement is a stage of life that begins when when we aged 55 or more. Handling finances during this stage brings with it its own set of challenges. Post retirement our focus needs to shift towards preserving the wealth we have created.
Doing this may not always be easy. Therefore, we must have a set of strategies in place to be able to handle our finances post retirement.
A retirement corpus must give the individual who creates it a sense of financial security. Also, the corpus must be large enough to ensure income stability throughout retirement. So as far as the size of a retirement corpus is concerned, the ideal size of a retirement corpus would be 30 to 45 times our annual expenses. Having a corpus of this size would cover for inflation, complete income stoppage post retirement and an increased life expectancy. It would increase the probability of us not outliving our money.
Also, retirement planning is a financial goal where our assumptions can get severely distorted in the real world. It may be a good idea to plan for an extra 25 to 40% of our target corpus to serve as a supplement to our corpus. Doing this would serve to help guard us against our assumptions being proved wrong in the real world.
As far as investments are concerned, at the age of retirement and beyond, the risk profile of individuals undergoes a drastic change. The capacity of such individuals to take risks post retirement may be significantly lowered. Also, the need for liquidity and income generation supercedes the need for portfolio growth. This effectively means that portfolios must be primarily geared towards fixed income products with minimal allocation to equity. A portion of the money that is not required for a period of 10-15 years post retirement can be invested into equity. This would give the money enough time to grow at a reasonable rate. It could also serve as a strong financial foundation which can be taken over by the successors of these individuals.
The post retirement phase is also a great time to put one's affairs in order. This can be done through the creation of a legally enforceable will. Of course, there is no need to wait until retirement to create a will. But those who do not have an effective will at the time of retirement should not stall it any further. A will is best prepared when it is drafted with help from a competent legal professional.
Retired individuals must have a clear idea of who their intended beneficiaries and guardians for minor children (if any) are. They must also have a central storage point for all supporting documents related to the will. I have spoken in detail about the creation of an effective will in an earlier post, Passing On The Torch.
Another very important aspect to take care of is to ensure that all debts are paid off before retirement. Lastly, it is important for retired individuals to optimally manage their exposure to real estate. Retired individuals must ensure that their real estate portfolios include only those properties which they would actually make regular use of. They must also be able to manage them effectively without much stress.
To sum up, financial planning post retirement is heavily dependent on the work that is done before retirement. Investment portfolios must mainly be geared towards debt and fixed income products. Money which is not required for 10-15 years post retirement can partly be put into equity. Those who do not have a legally enforceable will at the time of retirement must create one immediately. Retirees must also ensure that they pay off all their debts before they retire. They must also stay away from taking on fresh debt post retirement. And finally, their real estate portfolios include only those properties which they would use and be willing to manage.
That's that for this post and this series on personal finance strategies for everyone. Individual strategies for each phase are different. But they all tie in together over the lifetime of an individual. This is evident because the work done in one phase sets the base for the next. Following sound strategies during one phase makes planning finances in the succeeding phases easier. Following the strategies prescribed for each phase diligently would help us extract the most out of our money, all throughout our lives. I have linked the first two posts in this series below. Do feel free to have a look.