Retirement And Financial Freedom: The Ratio To Watch Out For!

By Suresh Sadagopan

Life happens, and the years roll by, and before long, we find ourselves on the threshold of retirement. We have multiple goals in life that need to be planned for, like children’s education, home, vehicles, etc. Some such goals are discretionary, like holidays, farm houses, and some are indulgences like a world tour and luxury indulgences, which are good when they are there, but not essential.

Retirement, on the other hand, is something every one of us needs to plan for - it does come eventually, even if one has not planned for it! At retirement, one will have the lifetime wealth with which to take care of all expenses and goals in this phase. Retirement is a pretty long innings and needs to be planned properly.

The illusion of comfort with wealth at retirement

At retirement, people receive their retirement settlements, which add to the investments they have made over the years. All these together come to a good amount and lull one into feeling that there is sufficient money to go around. Most people reach this conclusion just based on the seemingly big corpus, without resorting to any calculation about withdrawals for expenses and goals. Some people also act up based on this premise and end up spending a good amount of money towards various goals and pursuits.

Ignorance is not bliss when it comes to money. In fact, it extracts a hefty price. And if that happens in retirement, it will be catastrophic.

Staying on top - Those who have financial advisors who understand their needs would have a proper plan during retirement. The advisor would have assessed the income to be set up in retirement, taking care of travelling and other goals in this phase, medical provisions, legacy, and succession planning.

But many do not have advisors who will handhold them in this phase. Life can become difficult for such people as they make some mistakes/ blunders in this phase. It will get challenging even when they have wrongly assessed how much they can spend and tend to go overboard with their expenses. All these will result in a dwindling corpus.

Rebounding will be difficult, and they may have to make compromises that can impact the quality of their life, which they may not be happy with.

What can be done? The first and obvious thing is to get hold of an advisor who will take charge and advise suitably. This way, one can be hands-off with respect to finances in the secure knowledge that the advisor is guiding them in their lives.

If not, one will need to be a bit hands-on in terms of ensuring that the portfolio will yield the income needed for expenses and goals, and the balance is sufficient for the lifetime. This needs a bit of calculation, which may be beyond most people.

There is a simpler way to keep track.

Know the pulse with this simple ratio - There will be financial investments, and there will be properties. Assume a 6 per cent return from your financial investments and add any rent from properties. Reduce any taxes being paid. This is the potential surplus you are generating from the portfolio, in that year.

Now, see if this surplus generated is more than the expenses in the year . The ratio to look out for is the surplus generated to total expenses. If it is more than 1, it means that one is not touching the corpus and is living off the income being generated. As long as this ratio is above 1, it is good. The moment it dips below 1, it indicates that one is eating into the capital too.

The thing to note is that there is nothing wrong with dipping into the capital at a late stage in life. But, that should be as late as possible - like at 80 years or more. This will ensure that one will not run out of money before one’s lifetime.

Using this ratio - This basic ratio can be used to keep one on the straight and narrow path. If the ratio goes below one, one can examine if there is any way they can reduce expenses or goals.

If that were not possible, at least they will know that they are dipping into their corpus for their expenses. This knowledge itself is very useful as it sensitises them and hopefully makes them far more conscious and careful about their spending.

Keeping track of this ratio is not very difficult. But this one ratio will shine a light on how healthy they are with their finances and future. This is an easy way to make retirement peaceful & worry-free financially.

Suresh Sadagopan is the MD & Principal Officer at Ladder7 Wealth Planners and the author of the book “If God Was Your Financial Planner”

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)