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How to do retirement planning at 50 years?

Saravana Kumar, Dec 31 2017, 19:54 IST
Old couple looking their savingRetirement

Old couple looking their savingRetirement

It's never too late for retirement planning. It is possible to plan for retirement even at the age 50.

Reduction of expenses: We need to control over household spending, even as the income from employment continues to flow in. As the number of dependents drop and the need for newer physical assets like a house and car reduces, expenses as a percentage of income should ideally drop.

In retirement, the income ceases, but the spending persists. If the income from assets one uses in retirement not cover the expenses that a household is used to, an inevitable compromise in the quality of life will follow.

Expenses can be classified as mandatory and discretionary. Mandatory expenses are the ones that the household cannot do without, discretionary expenses are those driven by the lifestyle and leisure preferences of the household.

When income increases and more money is available after meeting mandatory expenses, many households increase the discretionary expenses. When these expenses are habitually incurred, they create a lifestyle creep, or the insidious conversion of discretionary expenses into mandatory ones.

Not too late: Some people express that they did not start early as mandated by retirement planners. They worry if it is too late already. What the advocates of early saving miss, is the power of quantity. The reality of many households is that large amounts are available to save only as one advances in age, and income.

It is true that Rs 10,000 saved for 30 years at 8% will become a valuable Rs 1 lakh. But given that the monthly salary of a typical 52-year-old when he began to work 30 years ago was merely Rs 3,000, saving Rs 10,000 a year is a tall order. However, with a current salary of Rs 2 lakh a month, setting aside Rs 50,000 a month is not a tough call. This sum would also grow to become large in the limited time it has until retirement.

The percentage of income that a household saves should progressively increase with time. Beginning with a 20% saving rate in the 20s, a household should ideally reach a 50% saving rate by the 50s and with increased income in the later years, set aside more towards retirement.

If a household took 15 years to build its first million in assets, it will typically find itself able to build the second million in the next 10, and the third and more in the next five.

Debt-free before retirement: We need to get rid of all debt by either transfer or paid before retirement. For example, parent took loans to send his children to the best schools for higher education. The children will soon graduate and hold paying jobs that should enable them to repay the loan. The parent should seek a transfer of the loan to the child and relieve themselves of the debt.

Ideally, your retirement corpus should earn enough income to simply replace your salary income when you retire. However, not everyone has saved enough and even if they have, the corpus is not invested such that it can generate adequate income. Loan repayments burden the already fragile corpus and its earnings. It is a good idea to strive towards debt-free 50s as a financial goal.

Get job before retirement: Begin to work towards your next career even as you continue to earn and thrive in the current job. It is a bad idea to begin seeking a job after retirement, when the networks, contacts, and connections have all severed from the job you were doing earlier. Find out what you would like to do, and work towards securing it early.

A concrete plan for what you would do after retirement, and investment of time, money and energy in securing that pursuit, will help tide over the constraint of not having an adequate retirement corpus. Earning for a few years after retirement means you do not draw on your corpus and thus give it the ability to grow in value.

Assets allocation: The textbook prescription is to have 30% in property, 30% in equity, and 30% in fixed income. The balance 10% could be in cash and gold. The property is likely to be the one you live in. The equity will secure your retirement, growing in value and protecting you from inflation. The fixed income will deliver the income for your expenses.

It is possible even at 50 years, to realign assets to this ratio, provided you haven't invested in too much property, do not overspend, and are willing to build assets through aggressive saving and investing habits.

(The writer is CIO at LIC MF)

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