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  1. Investing: Retire debt-free

Investing: Retire debt-free

Today, many people plan to retire early owing to the multiple reasons.

By: | Updated: February 9, 2016 12:10 AM

Today, many people plan to retire early owing to the multiple reasons. High salaries in certain industries encourage some to retire in their late forties. Others exit their career early to escape unrelenting work pressure and corporate rat race. They cite various interesting reasons such as getting bored, plan to leverage on their secondary skills and hobbies, to spend more time with family and relatives, like to mentor the next generation, be part of an NGO, doing voluntary work, etc. The reasons are really reasonable but it is not possible to retire without some planning and backup.

Assess your cash inflows

Post-retirement one needs to maintain the same standard of living as compared to that of pre-retirement. So, it is essential to understand the cash inflow that would be required for living. If you don’t know what is your annual expenses, debts and estimated taxes are going to be after retirement, it is nearly impossible to figure out if you have accumulated enough assets to sustain your needs throughout retirement. You can simply maintain an actual statement of expenses over several months to get an average monthly expenses. You need to figure out how much you will need to withdraw in the first five years of retirement. Then start to shift that money into more conservative investments to make sure that you will have that five-year runway. Develop a contingency fund equal to at least six months’ worth of living expenses and keep the same in nearly liquid asset which could be used in case of exigencies.

Don’t forget inflation

Have you assessed your cash flow needs? Be aware that this number is going to be higher a couple of years down the road. When you are planning your retirement you must factor in for inflation. This simply means that things are going to cost more in the future, therefore requiring more cash flow to maintain the same lifestyle.

Proper asset allocation

Judicious asset allocation is an integral part of retirement planning. Ensure that your portfolio is not too aggressive as a market fluctuation can wipe out significant part especially if you need cash urgently. You need to invest some part of your money in capital growth asset class but it is important that you need to have adequate liquid cash to lead your new lifestyle. Your asset allocation should be in such a manner which should provide you a regular income, even slightly lower than your last salary.

Retire debt free

It is always the best scenario to retire debt free. It is not uncommon for people to retire with a housing loan. Ensure that you have very limited amount is outstanding against your housing loan. Constantly worrying about draining your retirement accounts to keep up with mortgage payments or credit card bills is not really an enjoyable retirement.

Factor in health-related cost

As you are retiring early, you must shop around for the best health insurance coverage. Failing to include this in your budget can be quite expensive. Prior to transitioning into retirement you also need to understand what kind of financial impact a major health issue could have on your retirement assets. Make sure to budget for proper health insurance coverage and its premium in your monthly cash flow. For an added measure of safety for your assets consider exploring insurance coverage which even cover assisted living and or nursing-care. It is always advisable to go for a comprehensive health insurance at an earlier age because if you go for a comprehensive health coverage in later part of your life, insurance company could probably turn down your application or even enforce a waiting period for illnesses which you have.

An early retirement is an exciting and stress free time in your life, and it can be. When you are planning to retire early, there is certainly a lot to think about and many questions to be answered. By taking a little time to develop your retirement plan there is no reason to believe that an early retirement can’t be the leisurely and pleasant experience.

Asset assessment
After retirement, one needs to maintain the same standard of living as compared to that of pre-retirement.
It is essential to understand the cash inflow that would be required for living.
Develop a contingency fund equal to at least six months’ worth of living expenses and keep the same in nearly liquid asset which could be used in case of exigencies.
As you are retiring early, you must shop around for the best health insurance coverage. Failing to include this in your budget can be quite expensive.

The authors is associate professor of finance & accounting in IIM, Shillong

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