Retirement: Change your financial mindset

By Larissa Fernand |  22-02-23 | 

When one retires, the focus should shift to cash flow and not just the income from the assets. Experts share their views. 

Retirees think: “How can I earn income with my assets?”

How they should think: “How can I fund my cash flows with the assets I have?”

There's a mindset, even in retirement, to invest in assets that have a yield. Stocks that pay a dividend, for example. But thinking of income detracts from the concept of retirement. You've spent your entire working life building up a volume of assets that you can then use to retire on. So, why wouldn't you draw down on some of that capital? Why are you only living off the money that your money makes?

In the accumulation phase, almost all individuals have the same goal: accumulate as much wealth as possible, keeping with the risk level that I can cope with.

In deaccumulation or in retirement, we all become individuals. Different lifestyle aspirations. Different ideas about retirement. Different spending patterns. Different bequest motives. Different life expectancies. Different timings of cash flows. You don't know when you're going to need cash flows for major events like healthcare related events.

- Jody Fitzgerald, Morningstar Investment Management

Before being a financial adviser, I saw a lot of marketing for financial advice focused on growing investments. But when I got to a firm, I realized that the primary job was not really growth and accumulation, it was actually preservation.

Specially in retirement planning, where one of your primary jobs is not just to help people manage their investments, but also to encourage them to spend all that money they’ve saved for decades.

Flipping the switch from accumulation to distribution is such a huge significant mental hurdle. It’s not even really financial.

It surprised me that the financial-services industry was really focused on growing assets at a time where you should actually be looking at ways to support additional spending—assuming that the clients’ financial ecosystem aligns with that objective.

- Cody Garrett, U.S.-based certified financial planner who provides advice to do-it-yourself investors (DIYs)

As you shift from your working years into retirement, think about the changes and the expenses 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.

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.

Have a spending target and then, flex around that.

- Maria Bruno, retirement specialist at Vanguard

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ninan joseph
Feb 26 2023 01:39 PM
 For the first time, SBI has come out with a FD product which gives out a EMI of principal and interest over the next 10 years. This is something reverse of a loan. The person gets a portion of principal and interest over the tenor of the FD. All Banks in India only give out interest in a monthly or a quarterly basis. But this new product gives out a portion of the principal and this is great as the interest rate is locked for the FD tenor and you get a principal and interest.
This is one option. But do note on maturity date there is nothing, it becomes zero. The disadvantage is that it is limited to 10 years.

RBL Bank has come out with a 20 year deposit at 6.25% (normal deposit where only interest is paid out but tenor is 20 years) This is also one of its kind in India where banks used to give deposits only for 10 years. For senior citizen the rate is 6.75%. This too is a good product to invest to lock in the rate.

So a retired person, should distribute his corpus in a such a way that he can use a portion of his corpus into this. The remaining in FD with interest only paid out in a quarterly basis.

Both of this should be good enough to meet monthly expenses.

If the retired person do not have any one to give his inheritance, a portion can also be put into life long annuity with insurance company. This will ensure that there is a steady cash flow from the annuity until the person dies.

If a person tries to copy the annuity model by himself by taking out a portion of the principal, he will end up with outliving his corpus. So be careful on this aspect.
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