When you are investing you need to know your financial goals. At retirement it is necessary to know your financial and lifestyle goals. Mostly people cannot identify their discretionary and non-discretionary expenses clearly. Hence estimating their total retirement requirements becomes very difficult.
That brings us to a very important part of Retirement planning. Identifying the DISCRETIONARY expenses and NON-DISCRETIONARY expenses.
Discretionary expenses are the money that you spend on comfort and luxury needs. Non-discretionary expenses are those which are necessary for day to day living – rent, food, basic needs, medical insurance – COMPULSORY expenses, and discretionary expenses are the VOLUNTARY expenses.
Saving and Investing at age 30 for expenses to be incurred at say age 55 to 95 is surely not easy. A lot of us will tell you that. Get a retirement calculator and find out how much money you will need. It is important to write down all your possible expenses – the more detailed, the easier it will be able to estimate the expenses.
Non-discretionary expenses are the expenses on Utilities – rent, electricity, food, groceries, basic transportation, medical expenses, medical insurance, life insurance if relevant, taxes, debt repayment if any,…etc.
Discretionary expenses – are those expenses that a person incurs over and above the non-discretionary expenses. Examples of these kind of expenses are travel, hobbies, luxuries, expenses on children and grandchildren. Some of you may be wanting to travel from Coimbatore to Goa, but some of you may be wanting to travel to USA or Europe. What happens if you have plans to travel to Everest Base Camp? You need to spend money on a good gym, health supplements, trainers etc. – obviously these are voluntary, but something that you would love to do. Do you want to pay for a house that your children are buying? Or for Ivy League education (for many seniors this is a very satisfying expense – it costs Rs. 2 crores to do an MBA in USA). So whatever it is write it down – scaling up or down can always be done at a later date.
Your spending habits throughout your life – and retirement will change as your financial needs and goals change. Obviously you will need to ensure that your income is good enough for all your discretionary and non-discretionary. Although your non-discretionary expenses may not offer much flexibility, your discretionary expenses can always be changed and adjusted as per your earning. If you simply cannot live without one of your discretionary expenses – remember that may be in non-discretionary list!
Start planning for your expenses now. ASAP. It is never too late or too early to start planning for your senior years. What can you do now? For starters read all the blog posts on this blog. You could buy my book “Retire Rich: Invest Rs. 40 a day”. So how can you begin planning now? Review your current savings and assets. And don’t forget to review your asset allocation. Does your job look promising? are you sure you will have the job till you turn 65 years? Is your current allocation account for an appropriate? Does it account for inflation? Does it account for the length of your entire life – for you and your wife.
Planning for a successful retirement means taking a look at how discretionary and non-discretionary needs may change over time and taste. Your spending needs may change when you retire, over time due to the effect of inflation, death of a spouse, illness, or due to some other unexpected circumstances. Appropriately planning for what you can predict, and building in a safety net for the unpredictable, may help you on your path to a successful, enjoyable retirement. Consulting a good adviser is a sensible option. Do not get carried away by the “direct” option. That is ONLY for those people who can handle their knowledge and emotions. Can you?
What happens if you fall short of your target before you retire? Are you ready for that? What happens if you are hit by a series of poor returns and lose your capital substantially. You may not know whether your saving and / or investing efforts were adequate to provide enough for both types of spending. To make sure that this happens your portfolio should provide for all the growth, stability, income, cash flow that you and your spouse will require (or envision) till the end of your life.
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