A retiree also needs Guide to Financial Planning. A proper financial plan is more important than ever to ensure your money lasts as long as you do. Your retirement corpus must be good enough to take care of post retirement expenses.
Readiness for retirement is all time low. Dr. Pradip Bakshi (name changed) is a dental surgeon retired from Govt. of West-Bengal Health Department in 2006. Even after retirement from Govt. hospital he has been practicing in his own chamber at the age of 68 as he had no other options. While he retired his pension came down to almost 50% of his last drawn salary, he may continue his practice for another 3 years.
His both daughters are married and settled in abroad. His wife is 67, two years back her knees were replaced for osteoarthritis; she has not adequate mediclaim insurance coverage and Dr. Bakshi had to bear additional costs of Rs. 2.5 lakh from his savings.
Currently his income and expenditures are:
His yearly expenses are:-
Household and lifestyle Rs. 411000
Chamber Expenses Rs. 250000
International Vacation Rs. 200000
General Insurance premium Rs. 17627
Car loan EMI Rs. 115080
Total expenses Rs. 993707
His yearly incomes are:-
Pension income Rs. 257000
Professional income Rs. 900000
Intt. Income Rs. 41000
Total income Rs. 1198000
From the above illustration, when he retires at 71 and live up to 85 years of age the following changes may be anticipated.
His yearly expenses may be (3 years from now):-
Household and lifestyle Rs. 510584 (3 years from now assuming inflation 7.5%)
General Insurance premium Rs. 21000 (3 years from now)
Total expenses Rs. 531584 (3 years from now)
His professional/chamber expenses shall be no more; he may not go for international vacation.
His yearly incomes may be (3 years from now):-
Pension income Rs. 342067 (if it grows by 10% annually)
Intt. Income Rs. 60000
Total income Rs. 402067
There’ll be no more professional income; he’ll spend from pension and interest income only.
First year the deficit will be Rs. 129517, and gradually it’ll increase due to inflation.
A retiree like Dr. Bakshi thought he had a straightforward mission, daughters are financially independent he spent most of his Planning for Early Retirement benefits for both daughters’ marriage. He could manage somehow from pension, professional income and interest income. He retired from service and further engaged him in private practice without clear vision.
- Get rid of all debts. You must clear all debts at least 2 years before your retirement. Dr. Bakshi availed Car Loan even one year back, and was unwise for him.
- Build a real budget. Budget is very important, list all your expenses, you can see your spending and if you have already retired, be sure you have to live within your income.
- Increase your savings. Save your money even after retirement. Here Dr. Bakshi overlooked. Take a look at your budget and if possible save even a small amount.
- Be wise about your investment strategies. You may hire a financial advisor and keep your portfolio balance with proper asset allocation and rebalancing the same at predetermined period of intervals. Consider both inflation and taxes are silent killers and eat into your income.
- If you are going to retire, keep your job if possible through extension. Or you have already retired if get a job–full time or part time engage yourself till your health permits. This extra year work will help to protect you from outlive your money. Dr. Bakshi understood but ignored the seriousness of retirement kitty even after retirement of second job (own practice).
- Get adequate health insurance. Otherwise medical expenses shall siphon off the retirement kitty. In the case of Dr. Bakshi, his wife’s knees replacement siphoned the money for medical expenses from retirement kitty.
- Be careful about retirement funds. Plan and review all your plans regarding your Retirement Planning fund with your financial planner. Be sure s/he is an independent/fee based financial planner, and not someone who sells you product such as annuities, insurance, mutual funds etc. You ask question until you understand it.
- Postpone reverse mortgages. Reverse mortgages is your last option. When you see you are going to outlive your retirement kitty only then you can opt. It is a valuable option, but it needs to be postponed as long as you can.
- Retirement Benefits. If you are an employee if you have benefits like Pension, PF, Gratuity, Leave Salary etc, you need to review every year and your financial planner can help you to assess about the tentative values of all future benefits and can guide you accordingly.
- Engage a financial planner. You may engage a fee based financial planner who is unbiased. A senior citizen may not understand all the complexities of financial plan, unless s/he is trained in this field.
Without fear of outliving their savings, Dr. Bakshi and his wife were supposed to enjoy carefree holidays. They were supposed to spend more time with their grandchildren even in abroad. It was expected that they could stay active and live a healthy lifestyle. Their lives are unplanned and causing stress.
To conclude, today’s retirees face a sea difference than before, but a successful retirement is even possible, where there should be realistic goals combined with careful planning based on actively managed portfolio, unlike buy and hold strategy.
Disclaimer:This article is written by me and is my own original creation. If there is any claim to the contrary, I am solely responsible and I indemnify The Financial Planner’s Guild, India ( FPGI ) and any other publication that carries my article.