How to do retirement planning for late starters ?

My Gupta asked me the other day- ” I am 51, should I start retirement planning now ? Am I late starter ?”. The question prompted me to think on how to do retirement planning for late starters but before we go there, is 51 late in starting ?

Given all the basics of personal finance like the power of compounding and how to start young and invest regularly for your money to grow to a huge corpus, yes, 51 is a late stating age.

But the middle class investor cannot help – he often dips into his retirement corpus to pull out money when he needs it – it could be for the down payment of an apartment he wants to purchase or realizing the dream of buying a car or for educating his kids in some decent expensive schools. Being unaware of the fact that dipping into retirement savings should be the last resort, he uses away the money till he gets to an age when retirement is knocking on his door.

Investors like Mr Gupta are late starters but it is never too late to start on anything – let us see how retirement planning for late starters can be done.

Retirement planning for late starters – things to do

1. Get rid of your loans first – If you are going to retire in another 10 or 5 years, the first thing you need to do is close down all you loans. Be it a car loan, home loan or any kind of loan, it is wise to get rid of all your liabilities. The reason for that is you need to pump in all that you can save each month into investment avenues for building your retirement corpus. So money going away to a lender will reduce the saving ability substantially.

Another reason is that you do not want to pay Equated Monthly Installments (EMIs) after your income stops. That will drain your corpus more quickly than you realize. So close down your loans before you hit the retirement age. Having loans is a big no while doing retirement planning for late starters.

It is also a must that you have a house for yourself by now. You should not be targeting to buy a house during the last 10 years of your retirement. It needs to happen much before that so that the last 10 years can be used to close down the housing loan.

2. Organize your products – Well, truth be told – many investors have small small amounts of money parked in various instruments. It is not surprising to see 10 bank account, innumerable fixed deposits, many insurance policies – this is because over the last 25+ years of working , these products have been accumulated either by choice or by force.

It is time to re-organize them by closing down bank accounts that are not serving any purpose. In fact, there could be many unwanted insurance policies for which the investor must be paying premiums. These can be stopped and the policies surrendered – these will generate some money that can be used for contributing towards the retirement corpus.

3. Know what the ask is – First you need to find out how much money do you need to retire. Once you know what the ask is you can then realize whether they will fit in your overall income and expense lifestyle. But is it very important to know where you stand.

If you have a decent asset base built up till now, it will help you to form the retirement corpus faster. On the other hand if you have little or no money today, it is going to be an uphill task.

You must note that as your near your retirement age, you are earning the most in your career. In fact, the last 10 years of retirement see you at the pinnacle of your working lifetime and this is when you have the ability of drawing a larger take home. This money needs to be channelized to building the retirement corpus effectively. So with no liabilities and a fatter pay check, building the corpus in less than 10 years might be feasible. That is the key to retirement planning for late starters.

4. Where to invest for retirement planning for late starters – This is a decision that will depend on person to person. The obvious choice might be equities for people who still have 10 years to go as equity can give the most returns but the caveat still holds good – only over a long period of time. The choice of products in your portfolio is a very important thing in the overall scheme of things – no one can afford to go wrong while doing retirement planning for late starters.

If you have around 10 years left to retire and are wanting to build a large corpus, you can even go as high as parking 50% of your money into equities. Any higher than that can also be done but the more exposure to equity you take, the more risker it becomes. Since you are nearing retirement, you cannot afford to take undue risks in the name of earning higher returns. Safety of capital is of utmost importance, earning higher returns is not.

With equities, avoid direct stock exposure and instead go for equity diversified mutual funds with a large cap exposure and invest via systematic investment planning.

If you consider 50% of money parked in equities, the rest 50% should necessarily go in debt. As far as debt in concerned, try debt mutual funds, fixed deposits or Fixed Maturity Plans – it does not make sense to start investing in high lock in products like the public provident fund (PPF)  if you are say 5 years away from retirement.

However, if you have say 5 years to go before you hang up your boots, then it might not be advisable to take a 50% exposure to retirement. It needs to be less.

Avoid investing in insurance to build your retirement nest egg – so different types of life insurance policies should be a big no no especially Unit Linked Insurance Plans (ULIPs). This is one of the biggest blunders made while doing retirement planning for late starters.

Lastly, think 10 times before you buy another real estate an an investment. Property is very illiquid and you cannot afford to push in all your hard earned money and get locked into brick and mortar which you cannot get out of when you need it badly.

5. Health insurance – At 60 years of age, you will need to go to the hospitals more often. A health insurance for you and your spouse is a must have thing. Keep a larger corpus to the tune of Rs 5 lakh per spouse. It is also advisable to demarcate some medical corpus for yourself which can be used in the case of an emergency and when the insurance company’s contribution has fallen short.

Remember to take a decent health cover 4-5 years before you quit your salaried job and before you retire so that all the existing illnesses are covered by the time you stop working.

6. Pending future goals – I think it is very practical to assume that over and above doing the retirement planning for late starters, marriage of children might also need to be catered to after retirement. Our kids are going in for late marriages so the probability that they tie the knot after your income stops is very high.

Needless to say, you will need to cater to this goal much earlier in life. So in the last 10 years of your earning work span, you should have used goal based investing strategies to save money for these goals.

Your sunset days are the time when you sit back and relax and enjoy your life. It might look a bit sad if you don’t have the money to do so. So ensure that you are on target to meet your monthly cashflows post retirement – keep track of how you are progressing by doing 6 monthly checkpoints – read why retirees need to watch their retirement portfolio returns. Retirement planning for late starters is not an impossible thing to achieve if the above guidelines are kept in mind.