Retirement Planning

Retirement planning is a crucial aspect of financial management. Irrespective of whether someone wants to retire early or at the regular age(as per employment rules or social norms), proper planning and execution are important to ensure success. 

What is a successful retirement?

Meaning of a successful retirement life would vary for every individual. However, below are some of the common criteria:  

• to provide for all the basic needs of the retiree(and any dependents) from the retirement savings.  In addition to the basic needs, to be able to indulge in fun and leisure activities occasionally. 
• to have financial security from any unforeseeable events. This can be via medical and term insurance, as well as by keeping an emergency fund. 
• to be physically and mentally healthy. As retirees cease to work for an active source of income, it’s important to take up activities which keep the body and mind in shape. Sitting idle would be the worst form of retirement life. 
• to have an active social life by spending quality time with family, friends and other networks of people.  Retirement offers ample time which can be spent in pursuing a hobby, learning something new, volunteering, or doing community service.

To summarize, a retirement life in which a retiree is active and secure financially, physically, mentally and socially can be termed as successful. 

Important factors for retirement planning

• amount of retirement savings or investments
• returns on the retirement savings, tax liabilities on the returns
• cost of living post-retirement
• number of dependents  
• effect of inflation on the cost of living
• withdrawal rate 
• preparedness for emergencies(medical and life insurance, separate fund)
• post-retirement schedule and activities
• maintaining physical, mental and social well-being

How to plan for early retirement?

• Why do you want to retire early – The first and foremost step is to think clearly about early retirement. Why do you want to leave a job which is providing an active source of income? Every employee faces ups and downs in the job and impulses should not drive your decision to retire. Here is why I want to retire early. 
• Discuss with family and friends – Early retirement would affect your family directly or indirectly. Thus, you should have confidence and support of your spouse, parents, children, and friends. Having a discussion with them will give you fresh perspectives to think and plan. It will also reduce the chance of potential conflicts later.
• Find the purpose and meaning – Someone retiring at 40 would easily have 30-40 years ahead of him. Sitting idle would have negative consequences on the physical, mental and social health. You can pursue a passion or a hobby, learn something new, start a small business, do community service, volunteer for events or even take up another job(not primarily for money). Your retirement life would be much more fulfilling and satisfying by doing something which adds value. 
• Do the calculations – Set a target amount for your financial independence i.e. when you don’t have to work for an active source of income. Many online tools are available for calculations Ex. MoneyControl. However, retirement calculation is easier said than done because one needs to pay attention to a lot of details like:
  • your current assets and liabilities.
  • your current expenses and savings.
  • where do you want to settle? Cost of living is different in tier 1/2/3 cities.
  • do you already own a house or plan to build one?
  • what kind of lifestyle do you want to live – simple, balanced or lavish?
  • do you have(or plan to have) children? You would need to plan for their upbringing, education, and even weddings.
  • do you have any other dependents?
  • what would the effective returns on your investments after adjusting for inflation and tax liabilities? 
  • how long would your retirement corpus last?
  • would you have any inheritance?  
  • would your post-retirement endeavors provide monetary benefits?
  • other factors specific to an individual. Try to consider as many factors as you can. Here is our target for financial independence.  
• Execute the plan – Once you have a detailed plan, it’s time for execution. Achieving the target is usually associated with two things working in conjunction:
  • Decrease spends to save(invest) more 
  • Increase earnings
• Review and adjust regularly – Your investments can be affected by factors like equity market volatility, change in bank lending and/or deposit rates, change in income tax slabs, increase or decrease in the inflation rate, unforeseen emergencies etc. Therefore, it’s important to regularly review your progress towards the target and make necessary adjustments as and when required. 

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