Plan your retirement in 3 simple steps

Individuals have two forms of capital, human capital and financial capital. Many of us who work to generate income are human capital. Second form of capital is financial capital. Financial capital is our savings and investment.

We start our career as human capital. Over a period of time we save/invest and create financial capital. When we retire we only have financial capital. We remain human capital as long as we keep working. Moment we cease to work we become dependent on our financial capital

In most cases our human capital is stronger than our financial capital. If you are currently earning Rs 3 lakh per annum, you will require at least Rs 37.5 lakh worth of capital to generate income equivalent to your salary at 8.00% return. Also your salary will keep pace with inflation, while your returns from financial capital may or may not beat inflation.

The reason second phase of retirement is more difficult to plan is because, during this phase

1. We are dependent on our financial capital
2. There will not be any kind of addition to already created capital
3. Financial needs are unique and dispersed

During retirement we require liquidity to meet contingencies. We also require regular income to meet routine expenses and we also want our capital to grow at a rate, which is equal to or preferably higher than inflation.

All the three needs of, liquidity, regular income and growth are like three legs of a tripod. All three are needed for the tripod to stand. Unfortunately all are in opposite direction to each other.

If we place our entire retirement corpus into savings bank account, we will have liquidity. However, there will not be any growth. If entire retirement corpus is in stock than there is growth but income may not be regular. On the other hand if we invest all funds into post-office monthly income scheme/senior citizen saving scheme than there is regular income but liquidity will be at a cost of interest/penalty. (Also read - Bank FDs or FMPs: What must you choose?)