You may have started saving early but lost it all due to bad investments, reckless market playing or a business failure. While it’s extremely challenging to build a substantial nest egg when you begin late,
it can certainly be done with the right approach.
We all have our own personal retirement picture. While some of us are busy partying at our beach houses, others are packing their bags for a year-long world tour. Our mind pictures retirement as a time when we will have no Monday morning blues, no deadlines to meet, no kids to pack to school and no boring routine. Retirement is when we let it all out, live our dreams and relax. Add to it an unlimited stash of cash and we are good to go.
But wait, where does that unlimited cash flow come from? While those of you lucky enough to get sound advice in your 20s would have already accumulated a good retirement fund, there are many of us who are either yet to start investing, or are hit by a financial crisis—health problems, tuition fees for kids, a new house—and have no cosy retirement nest to fall back on.
So, what do you do when you wake up, are in your 40s or beyond, have an EMI to pay and are bank account-broke?
The first step is to get a reality check.
List your assets
Make a list of all your current investment details. Many of us tend to overestimate our net worth and a pen-to-paper experience is the best way to get a reality check. Add to it your annual income and your monthly expenses. A combination of all three—your investment, your income and expenses—will give you a correct picture of where exactly you stand and what you need to do for the future.
Next, chart down all your outstanding. Add up all those unpaid credit card bills, the monthly EMIs and the coffee tab to get a clear idea of your liabilities.
State your objective
Once your assets, liabilities and net worth are clear, the next step is to state your objectives. Where exactly do you see yourself financially when you retire?
Make a realistic plan of how much money you need when you retire to live comfortable. “You need 30 times your annual expenses at your retirement age. Say you spend A4 lakh a year at your retirement age—multiply that by 30 to get a figure of A1.2 crore as the corpus for retirement,” advises P V Subramanyam in his book Retire Rich: Invest Rs. 40 a Day.
Take a look at your current lifestyle—the one you want to continue into your retirement—and roughly calculate the amount you need for the same. This should give you a figure to work towards for your future requirements.
Make an RSS
Retirement Strategy Statement or RSS is basically a combination of your investment strategy and expected results. It also gives you an idea of how you should monitor your investments. An RSS gives you a complete low-down on your investment strategy and commits you to a disciplined investment plan.
The main elements of an RSS are:
- Your current assets value.
- Time horizon—when you wish to retire and the amount of time you estimate to spend retired.
- Expected returns from the investments.
- Tolerable losses—the most you expect to lose over a specific time period.
- Portfolio benchmarks—your investment plan.
List down your current assets value, then roughly calculate the time you have till retirement—if you are 40 now, you are a good 20 years away from retirement—plus your life expectancy—say 80 years. This makes your time horizon 40 years. So, you need to save enough money to keep you comfortable for the next 40 years.
Next, calculate the returns you expect from your investments and the percentage of losses you can tolerate every year without any major financial loss. Add to it your portfolio benchmarks—a portfolio is a basic listing of all your investment ventures. List down where and what per cent you wish to invest in each instrument (keep the expected returns you wish to receive in mind while making this).
This not only helps you get a clear idea of where you should invest to get specific gains, but also determines your current financial standing.
Plan of action
With a perfectly charted financial object in place the next step is to act on it. So what plan of action (POA) should you consider?
The best way to go about any investment is to have as diverse a portfolio as possible. Spread your investments to various instruments rather than just putting your money in a few specific things. While investing in your 40s it is best to stick to debt investments that guarantee safer returns keeping your risk-taking ability to a moderate level.
These steps not only give you a complete reality check of your financial standing but also help you determine how much money you actually need to save for a comfortable lifestyle.
