The first is the 40 to 60 year phase. We are starting to worry about retirement and hopefully having enough income, with good savings and good investments, by then. The main task of this phase is corpus accumulation. Don’t compromise on corpus size. Save more. Invest aggressively. Don’t sweat over security and income when you need growth and appreciation. Investing in stocks is the key to capital appreciation. Maximize your equity exposure in the NPS; having SIPs in diversified mutual funds; invest in index funds. Expand the corpus and make it big. Don’t worry about how much is enough and save to the best of your ability. An amount equal to 30 times your annual expenses is a good rule of thumb.
Mistakes to avoid: First of all, investing in real estate and hoping the rent will help your retirement is a big mistake. Managing an old property when you have aged is difficult. Maintenance will add significant costs and rental yields will be low. You will leave behind a large asset that you have not used.
Second, invest in fixed income products and choose conservative investment options with your corpus. Your salary is your income and you don’t need more. You need growth. Don’t sacrifice your corpus. Invest in stocks and allow them to grow and appreciate. Choose funds and indices over stocks. The second is the 60-75 age phase. You’re not going to use your entire corpus all at once, nor should you plan to leave it untouched to your heirs. Plus, you have assets of all kinds, including houses and gold. Consolidate them and decide how much you plan to use and what you want to leave behind. Be kind to yourself.
In retirement, you don’t have to match the income; you need to match your pre-retirement expenses to be comfortable. Lifestyle compromises don’t make anyone happy. What you need from your corpus and assets is a small one-digit drawing. Ideally, this should be no more than 4-6% of your corpus each year. A small percentage will keep you in peace. However, the calculation is complicated by inflation. Your post-retirement corpus must also increase in value, so that you can continue to draw without exhausting it. To draw, you have to grow up. Invest a small portion in stocks or growth assets. Mentally assign them to the bequest so you don’t worry about the risks. The portion you take and use is the portion that should generate revenue. Invest it prudently for regular income. Periodically shift money from the untouched, appreciating equity growth tranche to the regular-use, stable fixed-income tranche.
Mistakes to avoid: First, to think that the corpus must remain intact and not undergo any risk. This one mistake killed the quality of life for many retired investors. This is only true if you wish to leave the entire corpus as a legacy. Use what you have earned and saved for yourself. The bequest is the residual balance.
Second, assuming the corpus fixed income is adequate, and later finding out that inflation hits hard. Without transfers from the growth share, a fixed corpus will become exhausted. If you have the energy and ability to earn an income, do so for as long as you can, especially if your corpus was small because you saved less and invested conservatively. Don’t give up on earning income too soon and too easily.
Third, invest the entire corpus conservatively out of fear. Interest rates follow inflation and are generally lower than inflation rates for your specific consumption basket. Let a portion appreciate you and support you in the fight against inflation. Investing 30% in stocks is a good rule of thumb.
The third is the over 75 phase. Many of us should plan to live beyond this age. Nothing is lost if we don’t, but if we live longer without resources, we will suffer. Focus on consolidation, simplification and legacy planning. Don’t leave behind assets that are difficult to transfer and manage. Sell old properties and release blocked funds. You may not be able to use them now, but make it easier to pass them on.
Simplify your life so you don’t have to manage too many assets, accounts and paperwork. Consolidate your investments and keep them manageable. A bank account, a dematerialized account and a few mutual fund folios, that’s all you need. Make two accounts if you must, but close all others. Decide how your healthcare costs will be covered. Decide how you will use your assets during your lifetime and write a will to pass them on. Complete all documents related to appointments and joint participations. Keep it simple.
There are so many fears of the unknown when planning for retirement. The natural response is to predict, plan, and control, but these responses can also increase anxiety and worry. What matters is not the quality of your predictions for the future, but how you act when a problem arises. We cannot waste our lives preparing to fight unknown problems. However, we can prepare to react when an event occurs, if we have the flexibility of resources, time and energy. Keep your money at work, accessible and easily deployable.
This will gain detailed worksheets to plan and formulas to check. The biggest pet peeve of retirement is regret. When we reflect on life’s past, nostalgia is so comforting and regret, so burning. It’s never too late to learn the art of living in the present. When there are no major external problems, looking within can offer answers. You have plenty of time to work on who you are. Don’t focus on other people and your expectations of them.
Kabir Das says beautifully, “All these years I kept making the same mistake; the dirt was on my face and I kept wiping the mirror. Retirement is about becoming a better person. Look beyond money; a lot of things that matter could be there.
(The author is PRESIDENT OF THE CENTER FOR INVESTMENT EDUCATION AND LEARNING.)
