If you plan to retire within the next 10 years, here is a question for you: Are you ready to retire? Remember, retirement readiness is not just about your financial wealth. It is also about the change in your level of engagement post-retirement (how are you going to spend your time?) and about your physical health (how healthy are you?). In this article, we discuss about retirement readiness in the context of your retirement risk zone (especially, the 10-year period before retirement) and offer suggestions on how to be retirement-ready.
Financial Readiness
Besides working towards achieving your target portfolio value at retirement, financial readiness is also about taking steps to ensure that you have enough money during your entire retired life. So, what should you do to be financially ready for retirement?
First, if you are within 10 years of retirement, significantly reduce your equity investments and place the money in bank fixed deposits that mature on your retirement. This will substantially reduce the risk of losing wealth due to a sharp decline in the equity market when you are in the retirement risk zone.
Second, ensure that your children are financially independent before you retire. Otherwise, you may have to depend on your retirement portfolio to support your children. This may subject you to longevity risk- the risk that you may outlive your investments! But if you have children who are only about to enter college when you retire, you should create a separate portfolio to meet their financial needs.
Third, cover your healthcare costs adequately with medical insurance. This is important whether you are healthy or otherwise during your working life. Remember, it is not necessarily true that your health will deteriorate with age. With the advancement of medical technologies, your health is more likely to “square the curve”- a term used to mean individuals are likely to lead a long healthy life with minor ailments, followed by a sudden sharp fall in health condition.
Emotional readiness
You should stress-test your emotional readiness with your financial wealth. You should do this by managing your living expenses with your expected retirement income for at least 6 months, preferably, during the last year of your working life. This will prepare you emotionally for the lifestyle that you are likely to have in your retirement.
But stress-testing your portfolio is not enough for emotional readiness. Many individuals struggle to have a fulfilling retirement despite being financially ready. So, what should you do to be emotionally ready?
First, you should develop interest in non-professional activities. If you are engaged in professional work during the week and rejuvenating during weekends, what are you planning to do on weekdays when you retire? This appears to be the biggest issue facing retirees. You should mentally prepare yourself to spending time in diverse activities. Otherwise, the stress of not having full-time engagement during retirement may lead to adverse health condition!
Second, it is important that you prepare your spouse for your retirement! This is especially true if your spouse has been a stay-at-home parent; for your spouse may have to adjust to having you in the house during weekdays too! Also often, you and your spouse may have differing ideas on how to spend your retired life. It is important that you reconcile these differences, for immersing in work to de-stress your emotions is no longer a choice!
Conclusion
It is important that you transition smoothly from your professional to your retired life. If you are not keeping good health or if you are tired of keeping full-time employment but are not financial ready yet to retire, you should plan a phased retirement. That is, convert your day job into part-time employment; that way, you can receive stable income and yet enjoy leisure time during weekdays!
( The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. Feedback may be sent to >knowledge@thehindu.co.in )