Atul is 53 years old. He has had a great career and is now considering his Retirement Plans. He has everything sorted out. He has repaid all his loans. His daughter is about to complete her Master’s degree from a top university in USA. He has put aside enough money to celebrate an Indian style wedding for her in New York. He has a comprehensive medical insurance plan that can take care of any kind of medical emergency. He also believes that he has more money than what is required to live a luxurious retired life. Wow!
Can Atul be sure that he has enough money for a comfortable retirement?
There are several risks which could completely throw off his retirement plans, but the primary ones are inflation, market volatility and taxes. Inflation rates could go much higher than what he has planned for and upset all his calculations in terms of money required to run his day to day expenses. There could be significant market correction that leads to very low returns on his investments. No one can escape market volatility. Even if you own a lot of guaranteed income products, there is an implicit assumption that the guarantees will be honoured. We have witnessed enough instances where the guarantees have not been met. Last but not the least, the tax laws could change and hurt you badly.
Despite being aware of these challenges, we tend to take one big plunge on the day we retire. We review all our assets and re-allocate it in a manner that we believe will address all our needs in retirement. All retirement plans have underlying assumptions and our belief is that these assumptions are likely to come true. What if that is not the case? We are taking a huge risk with this approach. In retirement, you may not have the luxury of additional options that could help recoup any unplanned losses. This does not seem like a logical approach to retirement planning.
Shouldn’t there be a way where you can learn about managing your money in retirement? Is it possible to take an approach that helps you test your assumptions before you actually retire and make your investments? In my view, there is a way to do so. All you need is to put aside an amount that is required to generate income that is equivalent to 5% to 10% of your targeted income during Retirement. You begin to invest this money 5 to 10 years ahead of retirement and treat this portfolio in the same manner as you would have done during retirement. I strongly believe that the learning you will have through this process could be immense and can potentially safeguard you from big disasters in retirement.
How should you create a sample plan?
As I have shared, you take out a small portion and begin investing as if though you were already retired. The process that you will follow is exactly the same that you would have followed during retirement.
- Decide on the amount you need to meet your monthly expenses.
- Decide on the investment plan that you will use to generate these monthly expenses.
- Increase you withdrawal amount by a certain fixed percentage on a regular basis. For example 10% every 2 years or 20% every 5 years in order to see if your investment plan is able to adjust for inflation.
- Adjust your portfolio every year, if required, to reflect changes in tax and current market conditions.
- If you need some money for an emergency, think through ways you are going to generate the same.
Conclusion
A sample retirement plan created 5 to 10 years ahead of retirement can help you gain better insights into the real financial challenges that you are going to deal with in retirement. You not only test your assumptions but also get an opportunity to learn ways to respond to these challenges. You do not want to discover the inadequacies in your investment portfolio post retirement.
