Retirement is a word that evokes different feelings in different people. For workaholics who do not see themselves without their careers, the thought of retirement can be dreading. For those who see their careers as a means to an end, retirement cannot come sooner. Regardless of how you view it, retirement is an eventuality that few can evade. And if a recent survey is anything to go by, it needs meticulous planning and forethought.
In the survey(1), retirees aged 75 and above expressed regrets over how underprepared they were. In addition, a quarter of them said they underestimated how long their retirement period would be, leading to sustenance challenges. About 43% of respondents wished they had provisioned for later-life-care costs. And a resounding majority wished they had worked with an advisor.
Typically, many retirees limit their retirement plans to accruing as much savings as they can. The plan here is to retire and burn the savings. Such approaches seldom factor in future inflation, potential change in one’s circumstances, and the retirement period. When faced with unnatural situations, like the COVID-19 pandemic, retirees are often left with regrets.
Conversely, a shrewd approach would be to perform financial planning, keeping retirement as one of the concomitants. Other key considerations here are health and life insurance, emergency funds, and strategic and diversified asset allocation. Investments will allow retirees to generate passive income, enabling them to make the most of their time.
Retirement is a broad-based decision.
In a survey(2), which polled over 1,000 people in the UAE, about 44% of them said they expect to retire by 55, while 63% hoped to do so before they turn 60. While it’s safe to deduce that more and more people want to retire at the earliest, it is not a binary choice between working or not working. Many intend to retire to something, not call it totally quits. In other words, they want to take up something else to do. A few tend to venture into creative domains, at times starting something they’re passionate about. Whether or not it generates an income becomes secondary. A Harvard psychologist researching retirees(3) found that the happiest ones had built themselves new lives.
The retirement planning checklist
In another survey(4), about 45% of expat employees in the UAE were found to have no plans of ensuring an adequate standard of living after retirement or even working to generate income. The same survey found that 61% of people in the Emirates have no long-term savings at all. While savings alone will not provide total retirement protection, the lack of it is, simply put, a recipe for disaster. The first order of business is to have a plan, even if it pertains to just savings. An ample amount of savings will later open up the possibility of further fortifications such as insurance.
Debts are part and parcel of lives. While a higher debt-to-income ratio during adulthood is not a problem in itself, it can become one if debts linger close to retirement. So, clearing debts beforehand becomes an important part of retirement planning. One can start by paying off debts with the smallest principal or the highest interest rates, such as credit cards and vehicle loans. Paying more than the EMI will decrease the principal and the cumulative payable interest. Globally, household debts of retirement-age people have grown steadily in recent years, prompting experts to delve deeper into the causal factors.
Healthcare takes precedence
Fidelity estimated(5) that couples who retired in 2021 will need $300,000 to pay for medical expenses. Considering many are retiring with a mountain of debt, the aforementioned estimation essentially prices out many from good healthcare. As a result, healthcare becomes the mainstay of retirement planning, requiring adequate insurance to take care of long-term expenses. In addition to insurance, it is advisable to build an emergency fund that can provide further relief if the health situation requires relocation to an assisted living facility.
Among the regrets that retirees have, the lack of income-generating investments is the foremost. The conservative approach of keeping savings or end-of-service benefits as the means to support retirement only works in an ideal scenario. Pragmatic, forward-thinking retirees work towards building a diversified portfolio of investments that help grow the accumulated wealth. The idea of a good asset allocation varies with age and external circumstances. However, a general thumb rule is to take more risks early on, with greater exposure to equities. As retirement draws near, one can rebalance the portfolio, opting for fixed-income instruments, which tend to be less volatile.
Irrespective of whether retirement is a matter of “if” or “when”, you cannot go wrong by budgeting. At any juncture, a mere replacement ratio calculation — a rule of thumb that estimates what percentage of a person's pre-retirement income will be needed to maintain their lifestyle at retirement — will serve as an initiation for better budgeting. Thereafter, one can factor in all cash flows, eventualities, and unexpected circumstances to create a retirement budget. But sustenance continues to hinge largely on adherence, or the lack thereof, to the budget. It is advisable to involve partners, family members or advisors for more accountability.
That said, going by many studies — including the one mentioned above — there is a consensus that retirement, despite meticulous individual planning and financial discipline, can run into challenges, especially in volatile economic cycles such as the one we’re navigating at the moment. When financial markets are in a state of flux, they are hard to gauge without financial expertise. So, discerning retirees often work with financial planners, who tend to be in sync with the changes and are capable of making timely adjustments to safeguard finances. In fact, the average age of professionals seeking retirement planning from advisors is gradually coming down, thanks to greater awareness.
So, today, regardless of their age, when asked what the best time for retirement planning is, many have a simple answer: Now. If you subscribe to this notion, drop a mail to XXX to learn more about the subject.