Can’t I retire today?” asked a despondent X who had just been told by his employer that his salary would be indefinitely reduced by half the following month onwards. He was convinced he may lose his job soon and had lost all motivation to work. The covid-19 pandemic has caused many to feel insecure about their employment. For those who have already lost their jobs, finding new opportunities look daunting. So, the most common question I get asked by my clients is if they could be financially independent if they did not generate any income henceforth.
How long can their existing assets carry them? And if it does not stretch until the end of their lifetimes, what can they do to ensure they have money at the end of their lives and not life at the end of their money. Essentially, there are four financial planning levers that you can tweak today to influence future outcomes.
Increase income: If you can increase income by moving to a new job, negotiating a raise or supplementing your existing income, you provide yourself the ability to save more. Enhanced savings that are invested in line with your asset allocation enable you to reach your target retirement corpus sooner and, hence, retire faster. If you are already retired, even a part-time job with a small income can support your expenses. This additional income can then reduce the monthly draw down from your portfolio, allowing the retirement corpus to grow and compound for a longer period.
Increasing income or enhancing savings is especially crucial for those who have not created adequate assets and retirement is a mere touching distance away. However, it is also true that if you are at this stage of your life, you probably have the highest propensity to save. You may be at the peak of your income-generating capacity, and major expenses such as children’s education and home loans may have already been paid down. It is time now to hunker down and focus on building that retirement portfolio that will allow you to live your present lifestyle well into your retirement. You may not want to holiday in Nandi Hills after retirement when you enjoy the view from Mount Etna a lot more.
Reduce expenses: If increasing income looks unlikely in the current circumstances, you can reduce expenses to boost monthly surplus. This way, you increase the amount you save and invest each month and stay on track towards your retirement goals. However, knowing how much to invest, the tenure and return on investment is crucial to building your nest-egg. True that you are sacrificing current consumption for future gratification, but you will be thankful, especially if you are 70 and staring at a bank balance that barely funds a year of expense.
Extend working years: Most of you do not like the sound of it. It is also an option that you have the least control over. What if you are unwell and are unable to work? Or your employer does not postpone your retirement? Or you are unable to find suitable work after you retire?
If you have gotten off to a late start with respect to your investments, you may not have much choice but to pursue this option. Most of us should plan for a life expectancy of 90 years. If we retire at 50, we need to have saved enough to last us for another four decades. If we can push our retirement away by a few years, we allow our money to grow and compound for a longer time. The corpus will also need to fund expenses for a shorter retirement.
Reset asset allocation: Each of us has a specific allocation between safety and growth in our portfolios that enables us to reach our goals in the most efficient manner. It could be 20:80 equity to debt for some or 80:20 for others. If all the above levers are not viable to build your nest-egg in time for retirement, do consider tweaking your asset allocation to make it more aggressive. Of course, increasing the proportion of equity in the portfolio will render it very volatile in the short term. However, over time it helps compound your money faster. This is my least preferred lever, but if you have no other option, go for it. Ensure you have adequate money to meet short-term requirements, so you don’t need to dip into the equity portfolio to meet expenses during the accumulation years.
The good thing about structured financial planning is that it lets you peep into your future. If you find the future looking bleak, tweak one or more of these levers today and achieve your desired outcome for the future. Next time you want your fortune predicted, don’t go to an astrologer, make an appointment with a financial planner instead.
Priya Sunder is director and co-founder, PeakAlpha Investments