How Women Should Go About Planning Their Retirement

[Women and Financial Planning Series]

Session 5: How Women Should Go About Planning Their Retirement

We are glad to have you with us for our 4th Session of Women & Financial Planning series, and that is

How Women Should Go About Planning Their Retirement

Statistically, as you may know, life expectancy of women is greater than of men.

And ironically, women are expected to take a break from their careers to start a family, care for the young and the elderly, and manage many more household responsibilities. But often, this leads to decreased career earnings, and decreased contribution to retirement – which is one of the vital financial goals of life. One may live for 20-30 years post retirement for which we need to create a large enough corpus.

Ms Alicia Munnell, an American economist and a professor of management sciences at the Boston College's Carroll School of Management has aptly said, "The new retirement reality may be a messy proposition."

With rising cost of living, and responsibilities to shoulder even after retirement, indeed funding for retirement is not easy. Outliving the desired retirement corpus or it proving insufficient is the biggest fear.

Moreover it's been observed, women leave retirement planning to their spouse.

But given the fact that life is uncertain, it's best that women take control of their personal finances. If you, as a woman plan prudently, be disciplined, implement a wisely drawn retirement plan, and live within means; it can enable you to lead a stress-free life during your golden years, where you've dreamt of spending quality time with your spouse, children, grandchildren…and the entire family. Even, pursuing a hobby – be it gardening, writing, photography, etc.

However, this dream can be reality only if you plan early and wisely. Please recognise that retirement planning is the only key to remain financially secure, financially independent, and maintain a comfortable standard of living even in the later years of life, where you may not draw regular flow of income.

So, here's how you as a woman should go about planning your retirement needs...


Know where you stand...

  1. What's your current age –Your age may be just a number; but when it comes to financial planning, it matters a lot. It will define the investment horizon you have before you hang your boots, and accordingly invest in a host of investment avenues within each asset class to build the retirement corpus. If you procrastinate on the implementation of your retirement plan, you may not be able reach the requisite corpus for retirement. The key to blissful retirement is to start early. Remember, the early bird gets a bigger pie.

  2. What's your current monthly expenditure and lifestyle – The earning phase of your life and your outlook towards money, sets the tone of your lifestyle. Therefore calculate your current monthly expenditure to predict the corpus you would need if you were to maintain your today'1s lifestyle during retirement. Ask yourself, what you desire to do during retirement. This will help you get a fair estimate of your retirement corpus.

  3. How much is the current spending on your medical needs – With growing age, come several ailments. Therefore prudently assess how much you're currently spending on your own medical needs, besides the health insurance premium you defray. While you're estimating for the future, factor in medical inflation– and preferably be conservative assuming medical inflation at 10%.

  4. What's your Net Worth – Net worth refers to how much you own after defraying all your liabilities. Irrespective of your net worth, retirement planning is a must for everyone; but more so, if you're struggling to keep financial health in pink while shouldering various responsibilities towards family and others. .

  5. Can your financial and physical assets generate cash inflow for retirement – If you are already an investor, understand how liquid your existing portfolio is to generate a cash inflow during retirement.

  6. How's your risk profile –Knowing your risk profile which is a summation of risk appetite + risk tolerance will help you deploy the investible surplus wisely between equity, debt and gold while you endeavour to meet this vital life goal. This will thus ensure that you chart the correct asset allocation, which of course, needs to be reviewed as time progresses i.e. as you near retirement..

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  8. Do you have enough contingency reserves– Life as you know, is full of uncertainties. And uncertainties cannot be avoided but managed! So, examine how prepared are you to manage contingencies. Ideally, you should be holding at least 6 to 24 months of your monthly expenditure (including your EMIs) in liquid funds or a savings bank account as contingency reserves to deal with uncertainties.

You see, these are only some of the vital aspects that need a fair, unbiased assessment. There could be many more. Nevertheless, the objective is to be holistic and truthful while planning for retirement.

Here are 5 golden rules that'll help you live a blissful retired life…

5 Golden rules to a peaceful retirement

  1. Determine your retirement corpus – While you do so, ask yourself what you want to do post-retirementwhether you'll like to travel, pursue your passion – be it gardening, painting, photography, writing, or a variety of other things. This will help you figure out how much money you'll need… and even how you can monetise some of your hobbies such as photography, painting, writing, etc. on a part-time basis. Unless you know where you are headed, it is very difficult to get there. It's important to have some target in mind, to live the second-innings of your life comfortably. Thereafter, be sure when you want to retire and take an estimate of the life expectancy based on family history and health conditions. Your current age and the retirement age will set the investment horizon, and decide the amount you need to save and invest every month in host of investment avenues, in the pursuit of a stress-free retired life. But don't forget to account for inflation, as it erodes the purchasing power of hard earned money. To get a rough estimate, you can make use of online retirement calculators.

  2. Start Early, and Retire Peacefully – Procrastination is the biggest enemy when it comes to making retirement plans. So, don't live under a common belief that, "I have enough time to go before I retire, so why rush?" The more you delay planning for retirement, the greater will be the challenge to achieve the desired retirement corpus. Lesser the time at your disposal, higher the amount needed to be set aside to meet your retirement needs – so it can be hard on the wallet. Starting early facilitates a longer investment horizon, which allows you to compound your wealth better with riskier asset classes like equity mutual funds, which have the potential to earn higher returns over the long run. As you grow older, risk taking ability decreases; refraining you from investing in equities.

  3. Create an ideal investment portfolio and invest regularly –The ideal investment portfolio depends on your age, net worth, risk appetite, and the number of years you're away from retirement. These factors enable prudent asset allocation to equity, debt, and gold – which are important asset classes offering a variety of productive investment avenues. This table can indicatively help you allocate based on age and risk profile…

    Asset Allocation Strategy (in percentage terms)
    Risk Profile Aggressive Moderate Conservative
    Age Equity Debt Gold Equity Debt Gold Equity Debt Gold
    20 to 30 75 15 10 65 25 10 40 55 5
    31 to 40 75 15 10 60 30 10 40 55 5
    41 to 50 60 35 5 50 45 5 35 60 5
    51 to 60 40 55 5 30 65 5 25 70 5
    (Note: The above table is for illustration purpose only)
    (Source: PersonalFN Research)

    You must remember that merely following a suitable asset allocation alone will not help you reach your goals unless you invest regularly in sound and appropriate investment avenues.

    Further, recognise the risk-return trade-off every asset class.

    Risk-Return trade-off
    Asset Class Risk Returns
    Equity High High
    Real Estate High High
    Gold High High
    Debt/ Fixed Income Medium Medium
    Cash & Equivalents Low Low
    (Source: PersonalFN Research)

    Risk-return trade-off refers to the potential returns correlated with the risk of respective asset classes.
    The potential of a return rises with the rise in the level of risk. The table here exhibits that equities have high risk-high return characteristics, while debt is a medium risk/ return asset class.

  4. Track and review your plan – Besides regular investing, you also need to track and review your plan and portfolio regularly – at least once a year - to ensure that you're on the right path and pace to a peaceful retirement. Any changes in your personal finances need to be incorporated in your retirement plan to make sure that the plan meets your objective with the changing dynamics.

  5. Choose a suitable health insurance policy – As one grows older, physical ailments may also increase. Hence it's best to indemnify risk to health with an appropriate health insurance policy with an optimal sum insured, so as to not burn a big hole to your retirement kitty. Likewise, it's better to opt for a personal accident policy and critical illness policy from an early age.

If you follow these rules, planning for your retirement will not be a difficult task.

Before we wrap our today's learning session, here are a few…

Points to Remember…
  • The biggest fear of retirement is that you could outlive your investments or run out of funds.

  • Retirement planning varies from person to person. It's a complex task, and therefore it's worthwhile hiring services of a financial planner or a SEBI registered investment advisor who can handhold you.

  • If you're finding it challenging to save and invest for retirement, do not hesitate to cut down unnecessary expenses such as dining or partying out too often, frequent vacations, or any other frivolous expenses. Endeavour to save more by rationalising your expenses and live within your means.

  • Identify prudently where you stand as far as you net worth, contingency reserves, insurance, lifestyle, amongst a host of facet; and gauge your risk appetite prudently

  • Recognise, which of your physical and financial assets can draw a regular cash inflow during retirement. Also to draw a source of income, see how best you can monetise some of your hobbies on a part-time basis.

  • Factor in inflation slightly on a higher side to determine your retirement corpus

  • The age at which you wish to retire minus your current age, determines your investment horizon before you hang your boots

  • Ideally start early to retire peacefully. Procrastinating will only make the path to retirement challenging.

  • Create an ideal portfolio and invest regularly. Gauge the risk-return trade-off of every asset class, investment avenues, and ensure that it suits your risk profile.

  • Further, don't forget to review your retirement portfolio and the retirement plan at least once a year

  • Buy an optimal health insurance, critical illness plan and personal accident plan to avoiding burning a hole to your retirement kitty

  • Retirement planning is the key to be financially independent and secured during your golden years

  • And last but not the least, remember, retirement planning is a journey and not a destination

So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

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The Retirement Planning Guide

The Retirement Planning Guide