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A few days ago, at our favorite watering hole, my childhood friend Ashok and I celebrated his turning 50. Raising a toast to his “new innings” I thought I’d tease him a bit about his milestone. “Cheer up dude,” I said. “You still have another 8 years before you retire.” I could afford to be flippant because I was only 48 and not “old”. But the joke was on me – as I soon found out, the prospect of retirement did not scare him.
He said, “I will be retiring early and may even take a vacation abroad. I know I can afford it!” He had been thinking of retiring early for some time now and had made retirement plans that would take care of him and his wife through their retired years.
“What about you?” he retorted. “Are YOU prepared for your retired life? You are almost 50, you know....”
I admit I was not prepared, and Ashok chided me for it. “Retirement planning is important, you know”, he said. “If you haven’t planned for it, who knows what’s in store for you? Say there is a serious illness in the family; do you have the money for it? Do you want to sell your house or borrow from friends? After retirement, you may have to live frugally in a way that you may not be used to.”
I panicked a bit inside, but he reassured, “Don’t worry mate, you haven’t missed the bus yet. It’s never too late to start planning for retirement”.
His birthday celebration turned out to be a moment of realization for me. It hit me…
I need to start retirement planning NOW because….
1. It would ensure a monthly earning for the next 20-25 years following retirement.
2. I wouldn’t need to sacrifice a lifestyle I am used to and live comfortably knowing that I have a regular income.
3. In case of emergencies, I wouldn’t have to resort to extreme measures like selling my assets or borrowing.
Are you almost 50? Not yet planned for retirement? Here’s how you can play smart
Now, I knew I had to start planning for retirement. But how and where to start? Ashok simplified this for me, he said, “Just follow this 4 step process to plan your retirement in a smart way.”
STEP 1 - Get, Set and Go! - Set goals and start working towards it
At 50, you would have different goals that you may have to prioritize, such as expenditure on your children’s education, their wedding or medical expenses. Prioritize your goals and set timelines. With multiple goals, you must give priority in the order of importance and find out how long you have to achieve each goal. While retirement may be planned for many years ahead, make sure you factor it in early enough so that you can start working towards it.
STEP 2 - Wrap it Up! - Start closing your loans and debts
To maximize your investment towards your retirement goals, start to close your loans and debts. Ashok astutely said, “Ideally, you should be done with your EMIs by the time you hit 60 so that your liabilities are over, especially since you are starting late.”
STEP 3 -Make it less harsh- Organise your financial products
Taking the conversation to another level, Ashok categorically asked me, “Do you know how much you have? How much you need? Which funds need to be diverted to get better returns? What can be consolidated and what needs to be closed?”
Over the years, you may have invested in several finance options such as fixed deposits, savings accounts and other investment instruments. Say you have invested in a company that is performing badly; it would be a better idea to pull out and park this money in pension plans, ELSS, PF and bank fixed deposits.
Re-organize your financial products to build investments that would generate the money required for your retirement corpus.
As you are starting late, you must ensure that your portfolio inclines towards surety of returns rather than a high risk, high reward profile.
When you are in your 40s, it is suggested that you reduce your equity components. Ideally, in your retirement planning years, not more than 50% of your portfolio should be invested in equity options as it is riskier. It is better to invest in pension plans, ELSS, PF and bank fixed deposits.
Ashok’s aptly summarised, “Utilise what you have, save for what you need, invest smart and reap what you sow.”
STEP 4 - Build a Nest Egg! - Start investing a portion of your take-home salary
A dismal remark by Ashok crossed my mind, he said, “By 50, you should have at least 5 times of your annual income saved for retirement”. Yes, 5 times! I know I have to make ‘catch-up contributions’ to reach this corpus value.
To build your retirement corpus at this age, start by investing a larger part of your income, after deducting your monthly expenses. Like he said, “Know what you want and you’ll know where to invest.”
Want a guaranteed source of income after retirement? An Annuity Plan allows you to convert your savings into a guaranteed lifetime source of income after retirement.
Want to indulge in your investment appetite? A Unit Linked Pension Plan (ULIP) allows you to choose from an aggressive to a conservative approach. In this plan, the amount you invest grows over the years and is available to you at the time of retirement.
Want to allocate funds dynamically and stay protected from market volatility? A Systematic Investment Plan (SIP) or Systematic Transfer Plan is a convenient option for salaried people who are new to the capital market. It helps to allocate funds dynamically and protects you from market volatility.
As you are starting late, you can also invest in large-cap stocks (less risky) over a long duration to build your retirement fund. This will help you to earn additional income with fixed returns in your retirement years.
Given these 4 simple steps, Ashok definitely helped me breathe easy. Even though I have started retirement planning late, by prioritizing my financial goals, closing my liabilities, organizing my investments and setting aside money from my salary, I can save to build a retirement corpus in time. Like the old adage goes, ‘It's better late than never’, plan your retirement NOW!