Close to retirement? Then you MUST read this

By Larissa Fernand |  02-11-22 | 

Someone recently mentioned to me that he is semi-retired, but wants to retire soon and he is not very sure how to go about it. And he can't get much content on it because the focus everywhere is all about saving and investing when one is young.

A big lesson for pre-retirees is that they need to make retirement goals not just from a quality-of-life standpoint, but also from a financial standpoint. Because the activities that they plan to undertake in retirement will affect their spending.

Here are some key pointers by which they can gauge the viability of their plans and see what must be on their retirement dashboard.

Take the time to write down what you envision retirement to be.

Stop and think about what you envision your retirement to be. We often run and do the numbers. But first, you need to answer this question: What exactly do I want to do in retirement? Do I want to travel? Do I want to play golf a few times a week? Do I want to volunteer? Do I want to do part-time consulting work? Do I want to take up gardening?

What does retirement actually mean for you? What is it that you are retiring from? What is it that you are retiring to? Retirement is not a destination; it is a brand new phase of your life. You have to plan through it. Building up a retirement corpus is just one aspect. Figuring out your life and how you plan to spend your time is the other. It would be a shame if you attain financial independence only to be confronted by an existential crisis.

Ensure that your goals are aligned with your family.

If you're married, you should calibrate that with your partner. There could be a situation where one spouse wants to travel, but the other really wants to stay home and spend time with the grandkids. If the goals aren't aligned, you both need to figure out where to compromise and what must be done.

Retirement means different things to different people. Don't just assume that your family is on board with your plans. If you live with your children, you will have to rope them in too. You may want to watch TV for hours on end, but the other members of your family could find that irksome.

Think about expenses.

As you shift from your working years into retirement, you want to think about the changes and the expensed related to them.

What expenses are going away? Hopefully, all your debt would be cleared by the time you retire, so no more EMIs. The costs of commuting, lunches out, and work wardrobes will shrink drastically.

What expenses potentially are going to be added? This will largely depend upon what you want to do in retirement. For instance, if you do want to travel or you do have more discretionary type expenses because you have more free time.

That is why it helps to think about discretionary versus nondiscretionary. Nondiscretionary are things like rent, monthly society outgoing, insurance premiums, groceries, electricity bill, gas bill, wi-fi bill - things that keep the lights on, so to speak.

Taxes too. Generally speaking, you can expect your taxes to go down. But please do not assume that you will no longer be paying taxes. It all depends upon your income sources and how those income sources are taxed.

Discretionary-type expenses are the things that might be more leisure-type expenses, where you might have more flexibility depending upon what your goals are.

Have a spending target and then, flex around that.

While it is important to determine what your spending rates are before retirement, your allocation for spending should be flexible. So should you find yourself in a financially tight spot, your plan of action can be to surgically cut back on discretionary-type expenses.

Many dependent factors.

While you must ensure that you have a well-diversified balanced portfolio that will give you growth and income, you need to think about these elements together: Goals, Spending rate, Asset allocation. These three work hand in hand.

You need to figure out if you have any goals, such as passing assets to your heirs or paying for a grandchild’s holiday on graduation or paying for a child’s wedding reception.

Take the time horizon of such goals into account, and then personalize that with the asset allocation, your risk tolerance, and come up with a prudent spending plan. Adapt as you go along. It's not once and done.

Related Reading on Retirement

  1. 4 ways Longevity is going to change everything
  2. What I learnt from my trial-run retirement
  3. How different people define retirement
  4. 4 retirement planning blind spots
  5. Kickstart your retirement savings
  6. A late start to retirement saving
  7. Getting ready for retirement but not there yet

The above has been taken from a discussion between Christine Benz and Maria Bruno, and has been adapted for an Indian audience by Larissa Fernand.

Christine Benz is director of personal finance at Morningstar.
Maria Bruno is a retirement specialist at Vanguard.
Larissa Fernand is an investment specialist at Morningstar India.

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