Financial planning: Smart money moves to make after retirement
Remain invested in equities: Investors are often advised to redeem their equity exposure for debt funds and fixed income products as they approach their retirement age. However, a complete shift to fixed income products may prove detrimental to your post-retirement financial security. Fixed income investments seldom beat inflation rates and those in the higher tax slab often end up losing money after deducting tax from their inflation-adjusted income. A longer than expected life expectancy would make matters worse by increasing the risk of running out of your retirement portfolio.
Instead of shifting the entire equity portion of your post-retirement corpus to debt mutual funds and other fixed-income instruments, find your financial goals maturing within 5 years and invest the surplus in equity mutual fund schemes based on your risk appetite. This is because equity as an asset class beats other asset classes and inflation rates by a wide margin for time horizons of 5 years or more. Equity mutual funds are also more tax-friendly than most.
The beginning of your retirement life does not end the requirement of financial planning. While years of disciplined investment would have led to a sizeable retirement corpus, inflation and tax would continue to threaten its growth. Only a good financial plan and its smart implementation would ensure liquidity and longevity of your post-retirement corpus.
Fixed-income investments as long-term capital gains (profits after a year of investment) booked in excess of Rs 1 lakh per financial year are taxed at 10%.
Keep adequate emergency fund: The importance of an emergency fund for a retiree is as critical as for a working individual. In fact, the risk emanating from an inadequate emergency fund would be higher for the retirees as financial emergencies would force them to redeem their existing investments. This would exhaust their retirement corpus sooner. A financial emergency occurring simultaneously with bearish market conditions may even force you to redeem your equity investments at sub-optimal prices or at loss. Hence, estimate your mandatory monthly expenses such as utility bills, medical bills, insurance premiums, grocery expenses, etc for at least six months and park its equivalent in ultra-short-term debt funds or high yield savings account.
Invest your PF and gratuity proceeds in debt funds: Your retirement will give you access to life-long savings locked in provident funds, gratuity, and other retirement schemes. While many use the proceeds for buying annuities, they yield very low returns often underperforming even inflation rates. Instead invest the retirement proceeds in ultra-short-term, low duration and short duration debt funds to meet your short-term goals. These debt funds outscore annuities and fixed deposits in terms of liquidity and returns. The surplus money left after providing for short-term goals can be invested in equity funds and/or hybrid funds based on your risk appetite.
Buy adequate health coverage: Old age makes one prone to diseases and injuries, thereby increasing the share of healthcare costs in total expenditures. The high rate of inflation in healthcare services coupled with increased life longevity would push up the bill further. As there would be no employer-provided group health cover after your retirement, any unforeseen event leading to hospitalization might force you to redeem your retirement corpus. The only way to protect yourself is to buy adequate health cover, even if it comes with a higher premium. If you already have one, buy top-ups from your existing health insurer to cover the deficit resulting from the withdrawal of your employer-provided health cover. Top-up health policies cover the healthcare expenses exceeding the cover provided by your basic health policy. Buying a top-up health policy is far cheaper than buying an additional health policy.
Opt for a reverse mortgage: Reverse mortgage can be an excellent tool for supplementing cash flows for retirees owning housing properties but lacking adequate post-retirement corpus and/or pension income to support themselves. This facility allows senior citizens to pledge their house property for a lump sum amount or periodic disbursals spread over their residual lifetime. While the tenure of such loans usually goes up to 15 years, they can be extended until the borrower’s survival subject to the advance value of the house property. The repayment is not triggered by the borrower’s death or moving out of his house. The outstanding loan amount and interest accrued is recovered through the property sale, if the borrower or his heir fails to make repayment. The surplus generated from the property sale, if any, is distributed to the borrowers or his heirs.
FAQs
As a general rule of thumb, you will withdraw approximately 5% of your retirement income every year for expenses. The Balance breaks down the numbers below: Start with $240,000 and multiply it by 5%, which equals $12,000. Next, divide $12,000 by 12 months, which totals $1,000 per month.
What is the 3% rule in retirement? ›
The 3% rule in retirement says you can withdraw 3% of your retirement savings a year and avoid running out of money. Historically, retirement planners recommended withdrawing 4% per year (the 4% rule). However, 3% is now considered a better target due to inflation, lower portfolio yields, and longer lifespans.
What is the 4% rule in retirement planning? ›
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
What is the golden rule of retirement planning? ›
Embrace the 30X thumb rule: Save 30X your annual expenses for retirement. For example, with annual expenses of ₹25,00,000 and a retirement in 20 years, aiming for a ₹7.5 Cr portfolio is recommended.
Can I retire at 62 with $400,000 in 401k? ›
If you have $400,000 in the bank you can retire early at age 62, but it will be tight. The good news is that if you can keep working for just five more years, you are on track for a potentially quite comfortable retirement by full retirement age.
How to retire with $2 million if you make $100000 per year? ›
If you want to retire with $2 million, you'll need to invest about 12% of a salary of $100,000 starting in your 20s. Waiting until you're older will require a larger portion of your pay. If you wait until your 30s, then that number is closer to 17% of your salary.
What is the average 401k balance for a 65 year old? ›
The data comes from mutual fund giant and retirement plan manager Vanguard. In its 2023 "How America Saves" report, Vanguard says the average balance for its work-based retirement accounts for clients age 65 and up currently stands at $232,710.
What is a good monthly retirement income? ›
Many retirees fall far short of that amount, but their savings may be supplemented with other forms of income. According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
How long will $500,000 last in retirement? ›
According to the 4% rule, if you retire with $500,000 in assets, you should be able to withdraw $20,000 per year for 30 years or more. Moreover, investing this money in an annuity could provide a guaranteed annual income of $24,688 for those retiring at 55.
Which is the biggest expense for most retirees? ›
Housing. Housing—which includes mortgage, rent, property tax, insurance, maintenance and repair costs—is the largest expense for retirees.
Putting that much aside could make it easier to live your preferred lifestyle when you retire, without having to worry about running short of money. However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.
How long will $400,000 last in retirement? ›
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
What is the 80 20 retirement rule? ›
Better investment choices: According to the Pareto Investment Principle, 80% of investment returns can be expected from 20% of investments. Concentrating your investment decisions on the 20% of investments that are likely to generate the biggest returns may help you grow your savings faster.
What are the 3 R's of retirement? ›
Three R's for a Fulfilling RetirementRediscover, Relearn, Relive. When we think of the word 'retirement', images of relaxed beachside living or perhaps a peaceful cottage home might come to mind.
Which investment is best for retirement? ›
Here are four common investment options to help you generate income in retirement, listed generally in order from lower to higher risk.
- Income annuities. ...
- A diversified bond portfolio. ...
- Total return investment approach. ...
- Income-producing equities.
What is a good monthly income in retirement? ›
As a result, an oft-stated rule of thumb suggests workers can base their retirement on a percentage of their current income. “Seventy to 80% of pre-retirement income is good to shoot for,” said Ben Bakkum, senior investment strategist with New York City financial firm Betterment, in an email.
How much does the average retired person live on per month? ›
Retirement Income Varies Widely By State
State | Average Retirement Income |
---|
California | $34,737 |
Colorado | $32,379 |
Connecticut | $32,052 |
Delaware | $31,283 |
47 more rowsOct 30, 2023
Is $1000 a month into retirement good? ›
Advantages of the $1K Per Month Rule
Having more financial cushion in retirement will be helpful, especially in times of rising costs and high inflation. “Achieving the $1,000 a month can provide a level of financial security, as it covers a portion of regular expenses,” Ashton said.
How to realistically make $1,000 a month? ›
Let's dig in!
- Start Freelance Writing. If you love to write, picking up freelance writing may be your ticket to an extra $1,000 a month. ...
- Begin Blogging. ...
- Practice Graphic Design. ...
- Assist with Bookkeeping. ...
- Become a Virtual Assistant. ...
- Sell Something on Etsy. ...
- Manage Social Media Accounts. ...
- Complete Online Surveys.