One need not sacrifice his life‘s other financial goals to fund his retirement. He can enjoy his life and his golden years too.
Although retirement is one of the biggest goals of a person’s life, there are other financial goals that are also important, such as buying a car, going abroad, purchasing a house, etc. Let us take a look at meeting your financial goals while at the same time ensuring a comfortable retirement.
Create a financial plan - Once your financial goals are charted out, the next thing to focus on is your financial plan. This is the plan to achieve one’s goals. One should review their current investments, insurance, and other assets before making the plan. Once a review is completed, it is necessary to decide on the investment avenues that will be used to achieve the goal. This will be based on the person’s risk profile, age, earning capacity, taxable rate, etc.
A good financial plan lists down the long term and short term goals of a person, and this differentiation helps one to understand and predict the future expenditures better. This also enables one to figure out how to plan finances in various time periods. One should review their goals each year and check whether these have been achieved and if not how to change the plan to achieve these goals. Some goals could be to have an emergency fund for unexpected expenses, or for a child's education, marriage, etc. A person should also plan and keep a check on the funds required post-retirement. Retirement is one of the only times in life when expenses go up but the income stops.
Make a budget - This is one of the most important steps towards achieving one’s financial goals. A proper budget will help in ensuring savings and investment are done regularly, as well as keep unnecessary expenses and debt at bay. It is important to check the budget on a weekly and monthly basis to see if your expenses are within the budget or if they have gone over your income. If you are in the green (income is greater than expenses) then your budget is working for you, but if you are in the red (with expenses more than income), then it is time to rationalize costs.
Review the asset mix - It is necessary to look into the various assets possessed and the income generated from such asset. Sometimes it may require to change or diversify the investment portfolio accordingly to manage the risk and return. For example: A portfolio of equities could be rearranged to a portfolio of fixed income, to bring in security during retirement phase.
Keep an emergency fund - This is an important aspect of financial planning. One should always keep aside some money for emergencies in a liquid form (ideally in cash in a separate savings account). Ideally one should save four to six months of living expenses in this account.
Insurance - One should always keep in mind that insurance is critical and ensure sufficient cover. It is advisable to regularly check the cover and to estimate current and future insurance needs - be in for vehicle, home, life or medical, and then make a decision if there is sufficient insurance cover or to increase/ change the cover.
Invest from an early age - Investing early on will give one the benefit of compounding. An additional few years will result in substantial difference in the value of the investment over a period of time. For example, if investor A starts investing Rs. 50,000 per year at age 30 and investor B starts investing the same amount at age 35, when they both reach the age of 55, investor A has a corpus of Rs. 61 Lakh while investor B has only 40 Lakh (assuming both earned 8% interest per year). This shows that even a few years can have a substantial impact in the long run.
Determine the post-retirement Income and Expenses - It is crucial to ensure that a source of guaranteed income has been arranged to meet one’s basic requirements and for any emergency expenses. Sometimes you could find yourself spending more post-retirement on traveling, hobbies and entertainment. Healthcare cost rises significantly. So making a budget for all such expenses is very necessary. It is also very important to factor in inflation as every year, even the basic requirements becomes dearer.
Pay off debts - Paying off any outstanding debts before retiring, as this helps in avoiding interest payments during the course of retirement. As the source of income stops, it is very important to pay off such debts as it adds a burden of payment after retirement. But if such debts have not been paid off before retiring then make sure that your budget includes monthly payments to eliminate debt.
• Make a budget and stick to it
• Automate investments to ensure regular savings and peace of mind
• A financial plan should be made based on the risk profile, age, taxable rate, income levels, etc.
• Retirement planning should start early - the earlier the better
• Take into account the lifestyle, retirement age, big ticket expenses, etc., prior to deciding on a retirement corpus