I’m pretty sure you’ve thought about retiring at least once in your life. You may have had visions of lush lawns and a recliner where you could spend the balance of the day sipping tea and reading a newspaper or one of your favorite novels; life seems peaceful and simple. However, to do this, you must plan, and retirement planning involves different phases based on the age group to which you presently belong.
Phases of retirement:
The retirement planning money cycle is made up of three unique and different phases, that represent saving, investing, and spending down your retirement funds.
Which phase are you currently in?
Phase 1: Accumulation Phase (Age 25 to 35)
Accumulation is the stage during which you start to save money for retirement. This phase can last anywhere between 25 and 35 years, depending on when you start working (saving) and when you quit working. During this period, the aim should be to first set a realistic retirement corpus target and then invest regularly to build the target, which will later help provide for retirement.
There are several investment options available in this phase depending on the risk appetite an investor can choose to invest in. Provident Fund, National Pension Scheme, or Mutual Funds, are some of the popular options for aggressive investors; they can allocate a higher portion of their assets towards Equity, while a conservative investor can invest in debt or fixed income instruments.
In this phase, there will be other financial Goals for which you will need to plan, be it your children’s higher education or their marriage, or buying a house. This is the time to accumulate assets by saving and investing, typically from earned income set aside for retirement.
Remember that your ability to live comfortably throughout your retirement years will depend on the funds you saved, the investments you made, and the assets you gathered during the Accumulation Phase.
Phase 2: Planning, Preparation, and Preservation Phase (Age 50 to 60)
This is the main focus of your retirement planning activities, which needs to be taken care of seven to ten years before your planned retirement starts.
In phase 2, you will need to examine your retirement investments, projected costs of living post-retirement, lifestyle costs, potential tax liabilities, any monetary benefits to be received at the time of retirement, and any anticipated pension. A careful assessment is needed to examine how the continual rise in living costs may affect your future income needs.
Further, if the pension received is not sufficient, a required minimum distribution calculations from all qualified assets need to be planned; another important decision is regarding estate planning and any debt reduction possibilities.
This phase is also known as the transition phase, a shift from risky assets to safer assets is done effectively by reducing equity allocation during this period.
There are two possible approaches:
- You can do it in a linear manner like shifting 2.5 – 4 % each year until the allocation reaches 40% starting from age 50 till one reaches 59 years of age.
- You can do this reduction based on market conditions, if the market is at its peak you can shift substantial equity gains to debt.
Phase 3: Distribution Phase
All retirement planning is done with one major goal in mind: to build an income stream that you cannot outlive.
When your earned income quits, phase 3 begins. You will now start to receive any potential pension planned, and any anticipated income supplements from your various investments, which are the fruits of your retirement planning efforts.
How effectively you prepared throughout phase 1 or, the Accumulation and phase 2 or the Planning, Preparation and Preservation, will determine how much money you have to fund your Distribution Phase.