Grasp The Transition In Your Financial World

Emerging financial goals: In your 40s and 50s, major financial goals like children’s higher education materialise even as you prepare for retirement some distance away. Thus, there is a financial balancing act required for the long run.

Emergence of medical conditions: During this period, it is common for medical ailments like those related to heart and diabetes to get detected and consequently, health expenses rise.

Balancing money’s easy access with growth: Money meant for approaching goals needs to be in easily accessible and in low risk investments, like short term debt mutual funds or such other less riskier instruments. Needs 8-10 years away can still be in high risk, high growth, equity investments like equity mutual funds.

Preparing to replace pay cheque: As retirement nears, it is important to plan for regular retirement income sources that will replace pay cheque.

Here is a road map to navigate the 10 years leading to retirement.

Countdown To Be Retirement-Ready

10 Years to Go

Visualise your retired life: Retirement experts recommend that you do not “retire from” work but “retire to” a new lifestyle or life. This means addressing relevant questions like what activities will constitute a typical day in retirement for you and your spouse. A listing exercise will help determine retirement expenses that retirement savings will need to support.

Fix your retirement date: With the retirement date in place, you can firm up the retirement savings target and accordingly orient your regular investments.

Assess your retirement savings: Online tools like retirement planning calculator and retirement corpus calculator can help validate whether retirement date is realistic. Just in case you detect shortfalls at this stage, increase investments with Step Up SIP(Systematic Investment Plan) in mutual fund investments. Here, regular mutual fund investments are periodically increased by a predetermined amount, say for example 10% annually.

Consider specialised financial help: For better results in assessing and improving your retirement readiness, consider taking help of Registered Investment Advisors (RIA), financial planners and mutual fund advisors. One of the important areas of guidance is the often overlooked area of taxability of retirement investments resulting in high tax outgo in early retirement years.

There needs to be a mix of investments with tax free maturity proceeds like of provident fund and tax free maturity proceeds of National Pension Scheme (NPS) (60% of value) along with tax deferred investments like those in mutual fund investments. The last in pecking order are taxable investments like fixed deposits (FD). Consult your financial advisor before investing.

De-risk investments for imminent goals: As major financial goals like children’s higher education approach, aim to secure long term gains from high risk investments like equity mutual funds. This includes large cap mutual funds, mid cap mutual funds and small cap mutual funds.

The de-risking needs to start 2-3 years before money is needed and may be done with Systematic Transfer Plans (STP). Here, money is transferred to lower risk, short term debt mutual funds like ultra short term debt funds.

Review your protection needs: Consider enhancing health insurance and your emergency funds to 6 months of expenses and even 6-9 months if required. With terms of life insurance plans getting over by now, consult insurance advisors and financial planners to determine whether you need accident insurance for affordable life and income cover.

Plan on retirement housing: If you need to relocate and buy a house, the time to do it is now. Being a big ticket item, it is perhaps easier to absorb the impact home acquisition during working years and even get a home loan. Most importantly, it may not dent retirement savings.

Retire all loans: Embark on a plan to repay all loans well before retirement. This includes expensive ones like personal loans, outstanding credit card balances and home loan. Redirect EMIs of retired loans to SIPs in retirement investments.

Make an estate plan: This typically involves making a Will designating various self-acquired assets to various loved ones.

Five Years To Go

At this stage, you need to mostly do more of what you have already been doing.

Review protection requirements: This can be part of the annual reviews where you also anticipate future needs informed by family medical history. For instance, heart ailments for males and breast cancer for females. Enhance or widen health insurance coverage and emergency fund accordingly.

Start de-risking investments Use STP to derisk investments earmarked for creating regular income in the first 2-3 years after retirement, parking the money in short term debt funds like ultra short term debt funds. Ensure that remaining retirement savings continues to have equity exposure to combat inflation and preserve purchasing power, besides keeping volatility in control. Also be aware that the risk associated with equity investments in very high.

This can be done by moving away from very high risk investments like mid cap mutual funds and small cap mutual funds and seeking investments in diversified investments such as those in hybrid funds that invest in different asset classes. This means a mix of investments like index funds and large cap funds besides hybrid funds like equity savings schemes, balanced advantage funds and multi-asset allocation funds.

Plan regular retirement income Chart out a detailed plan of how tax-free retirement benefits like provident fund, tax-free portion of gratuity and Public Provident Fund (PPF) withdrawals will combine with recently derisked mutual fund investments.

One Year To Go

If you have been actioning the major points of the gameplan, you now only need small adjustments.

Review protection needs: Without employer health insurance coverage very soon, ensure that protection from own health insurance cover and emergency fund is adequate.

Make retirement income ready to use: This involves bringing money equivalent to a year’s expenses in liquid funds. To supplement mandatory retirement benefits like pension and provident fund, you can use Systematic Withdrawal Plan (SWP) in mutual fund investments. SWP in mutual fund seeks to create regular income with liquidation of units. You can use Systematic Withdrawal Plan calculator to estimate regular income from this source. Insights from financial advisors can supplement information from SWP calculator.

Clearly, when it comes to retirement readiness you just cannot put your foot off the gas pedal. The truth is that a comfortable retired life must be earned.