Financial planning certainly changes when you retire. Here we give a systematic approach to managing your finances during your retired days.
Retirement. To some, a daunting prospect. Have we saved enough? Will we be able to live, as we’d like to? What if illness befalls us? To others, the anticipation makes them dizzy with possibilities. Travel, hobbies, doing the things you’d planned for years earlier. After all, it does mean retiring from work, not life.
Two sides of the same coin, yet we struggle with the planning involved beforehand. Other priorities always seem to take precedence over the rigour needed to ensure you live a financially secure life. Of course, even if you are financially well off, you still need to be disciplined in managing your money for the long-term, as much as ensuring recurring expenses don’t slip out of control. Here we look at some of the key ways for you to manage your finances through retirement.
- Plan your monthly expenses
- Invest in instruments that will provide you with a regular return to cover household expenses
- Consider the tax implications if you have invested in debt-oriented instruments or FDs
- Invest in instruments that beat inflation on a post-tax basis
- Keep money required for short-term needs invested in debt funds, and that required over the longer term should include equity funds as one of its components
- Set aside emergency funds for medical emergencies, health check-ups & unexpected one-off expenses (house repairs etc.)
- Prepare your will. If you already have one, review it at least once a year to ensure your list of assets (physical as well as financial) is up-to-date, as are the beneficiaries nominated for each one
- Never stop working. You don’t need to have a full-time job. Being a consultant or working as a freelancer will not only bring in additional income but also keep you active, both physically and mentally
- Refrain from buying multiple pension plans to generate income. Such plans don’t provide protection against inflation, and usually, have a long lock-in period attached
- Do not park large sums in taxable debt investments
- Avoid investing too much in investment schemes that have capital loss risk
- Exposure to equities should not exceed 25% of your overall portfolio
- Never invest in just one type of instrument or fund. A diversified portfolio will be less risky in the long run.
- And don’t forget to mention the name of your nominee(s) on all your investment instruments.
- Personal Budget Planning
Preparing a personal budget is quite simple, but tedious. Why? Because it initially requires you to list every source of income and expenditure. However, once you complete the exercise, monitoring and changing expenditure patterns becomes easy.
The first thing you need to do is determine your monthly outgoings. There will always be fixed expenses (society charges, municipal taxes etc.) about which you can do very little. Most expenses are variable in nature and depend upon your total monthly or annual income. These can be controlled. Variable items include food, utilities, clothing, entertainment and travel – many of which can easily get away from us. Use your discretion to contain these expenses.
The next step is to collate your income from all sources (pension, investments, interest etc.), after which you need to deduct all possible expenses you think will arise during the month. Complete this exercise using a simple spreadsheet to see whether you really are!
If you have a negative figure for ‘Savings During The Month’, you’ve spent more than you’ve received in income. You then have three choices: cut expenses, increase income, or both.
- Manage Your Withdrawals
Once you have created your personal budget, you will have a good idea of the amount of money you need to live on. So be disciplined and draw from your savings in a studied and deliberate manner. The more you leave in investment instruments, the more they will grow in value.
The other type of withdrawal you’ll need to be aware of is when and how you liquidate investments that may have early withdrawal fees attached to them. Though these usually only apply to annuities, FDs and mutual funds, be aware of the ‘lock-in’ period and only invest in such instruments if you know you won’t need the money at short notice.
- Make An Account Of Current Savings
Most retired folk will have at least two sources of income. The first being from your pension plan, and the rest from income from other savings you’ve made over time (mutual funds, stocks & shares, FDs, annuities etc.). You may even have invested in property from which you receive rental income. Whatever the sources, it is important for you to track the income flows each one. And if you find you have spare income, re-invest it so that the real value of your savings continues to grow with time.
- Maintain A Fund For One-Off Expenses
In old age, our biggest source of concern is usually about sudden and unexpected illness. This is an absolute priority in your budgeting process, and you may need to keep some money available over and above the cover you receive from your health insurance policy.
However, that isn’t the end of things. You may well need to renovate your home every few years. Or you may want to buy a new car. For any such expenses or purchases, it is a good idea to maintain a slush fund that you can dip into as and when required.
Like other aspects of financial planning, managing your retirement income also requires planning. If you wait until you’ve retired to begin, you’ve already left it too late. Begin early, so any adjustments that need to be made, is done while you’re still working. And then you can really live the life you’d planned to lead.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.