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How Entrepreneurs Can Ensure A Peaceful Retirement - Outside View by PersonalFN
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How Entrepreneurs Can Ensure A Peaceful Retirement
Oct 16, 2017

Rohit Tibrewal runs his own garment manufacturing and export company. Prior to starting this venture, he worked as a consultant at a multinational company drawing a hefty pay check. Though he was doing very well, the drive to start a company of his own nudged him to take a leap of faith.

This decision had a bearing on his monthly income. After a handsome fixed pay check, his income now was variable and uneven.

At PersonalFN, we often come across individuals whose cash flows are rather erratic. This is seen particularly in the case of entrepreneurs or are self-employed professionals such as doctors, lawyers, chartered accountants, architects, etc. whose source of income is variable.

Fortunately, the environment for entrepreneurship is conducive and dynamic.

One of the big challenges entrepreneurs face is planning for their retirement. It is a vital financial goal, where they wish to maintain a comfortable standard of living during the golden years.

Today, young entrepreneurs are taking a sizeable quantum of risk, chasing their objectives aggressively, in the hope they'll live a blissful retired life later. Some are even averse to the thought of retiring from business. But whether we like it or not, as we grow older this thought will spring-up, and perhaps for the first time we would want to do something about it.

Even entrepreneurs need a sound retirement plan...

Often entrepreneurs are passionate about growing their business. They tend to invest their savings in their own enterprise, expecting a respectable return on equity. But, looking beyond your own business and diversifying your investment portfolio backed by a retirement plan is critical for long-term financial wellbeing. A retirement plan works similar to a business plan. It provides a roadmap to enjoy a blissful retirement later.

Please note, we aren't saying that entrepreneurs shouldn't keep pumping money in their ventures. As an entrepreneur, you should!

But, as you aspire to live a comfortable lifestyle and, probably, elevate your purchasing power, it works to take more responsibility and engage in prudent, holistic retirement planning. Involving your spouse in this exercise would ensure the plan is holistic. And the earlier you start, the bigger a retirement corpus you will be able to build.

Waking up when you are in your 50s and thinking about a retirement plan won't reap the desired results. With you working hard and smart to succeed in your business, take some time to write down and review your personal balance sheet. Assess the best way to leverage your existing assets towards your retirement plan. Make a prudent assessment, keeping emotions and biases at bay, and instead being objective in your approach (much as how you practice in your business and profession) will prove fruitful.

And while you in the asset accumulation phase of life ensure that you have an optimal life insurance--vide a pure term insurance policy--so that your family is safeguarded in case of an eventuality. Also, have health insurance plan for yourself and your family; so that, God forbid, a big fat hospital bill does not pinch your pocket.

Here's a 4 Step process to plan your retirement...

  • The first step in any retirement plan is to decide at what age you want to retire. Once you have determined a tentative retirement age, check your family history to approximate your life expectancy. If members of your family lived beyond 75, you are likely to have a longer life expectancy.Doing this exercise gives you two inputs for further planning, particularly, the time you have to build retirement corpus and how long you would have to depend on the corpus.

    Current Age 40
    Retirement Age 55
    Life Expectancy 80
    Time you still have to build retirement corpus 15
    how long you would have to depend on the corpus 25
    For illustration purpose only

    Suppose your age currently is 40 and expected to retire at 55; you still have 15 years to reach to your retirement age and will have to make a plan for 25 years post retirement assuming you would live 80 years.

  • Second logical step is to assess what your monthly expenses would be post-retirement. You may initially find it little difficult to calculate, but it is not.Start with your current monthly or annual expenses and subtract all such expenditures that you would not have to incur post-retirement. For example, money you currently spend on children's education or their recreation. You may like to make some provision for healthcare expenses that may be borne in your golden years. A ballpark figure is 80% of your pre-retirement expenses and will remain even after retiring. And if inflation keeps rising by 5% every year on an average, your monthly payments will naturally go up in absolute terms. For example, if your post retirement annual expenses are Rs 4.8 lakh per year today, this amount would climb to a little under Rs 10 lakh when adjusted for 5% inflation.

    Current Annual Expenses (CAE) (Rs) 600,000
    Post retirement Annual Expenses (Rs) @ 80% of CAE 480,000
    Long Term Inflation Rate 5%
    Annual expenses post retirement (Rs) 997,886
    Corpus needed at the retirement (Rs) # 19,871,818
    Money you should invest annually (Rs) ## 625,441
    For illustration purpose only
    # Assuming you will invest your whole retirement kitty at 7% for the remainder of your lifespan after retiring and rate of inflation will be 5%
    ## You could earn 10% returns for 15 years; i.e. for the time left from now till you retire

    Now, you are very close to arriving at the magic figure you need to work towards during your work/business life-span. If you are going to draw Rs 10 lakh every year for next 25 years (your post-retirement lifespan), how much money would you need at the time of retirement. The equation is: Assuming your real rate of return on this corpus (i.e. inflation adjusted rate of return) is 2.0%, you would need about Rs 2 crore at retirement. To reach this goal, you will have to invest a little over Rs 6.25 lakh every year for next 15 years, assuming the earnings are 10% returns on your investments.

  • The third step in retirement planning is to chart a personalised asset allocation. Asset allocation is nothing but the mix of various asset classes held in a determined proportion. Equity, fixed income, gold, real estate; are some examples of asset classes. Based on your risk appetite, return expectations, and years left in retirement, adjust the proportion of various assets you need to invest in. Within each asset class, there are a number of investment options. Like if you plan to invest in equity, choose to invest in mutual funds owing to the benefits they offer and preferably choose Systematic Investment Plans (or SIPs). This is the mode of systematic wealth creation over the long run. To invest in fixed income assets, you have a choice to invest in bank fixed deposits, debentures or company fixed deposits, debt funds, and so on. Select your options carefully.

  • The fourth and last step in retirement planning is, after the retirement plan is drawn and investments are done accordingly, review your plan periodically from a goal tracking standpoint, and take corrective measures if need be.

In case of entrepreneurs and independent professionals the sporadic, irregular cash flows, make the task of committing to a monthly investment for retirement difficult. However, PersonalFN believes, if the necessary discipline is adopted by focusing on the budgeting exercise, and regular investments are made in suitable wealth creating avenues, retirement planning for entrepreneurs and independent professionals is a less herculean task.

    "Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese" - Gene Perret

If you have a few years to go before retirement and need superlative guidance, we strongly suggest you sign up to PersonalFN's very popular service - The Retirement Letter. With every monthly issue of The Retirement Letter, we will walk you through the complete journey that leads to a HAPPY and BLISSFUL retirement. In fact, we will tell you EVERYTHING that is crucial to plan your dream retirement. And there's much more... subscribe to this service right away and take your first step towards a dream retirement!

If you need unmatched handholding in your retirement planning exercise, PersonalFN's Retirement Planning Service can be of immense help. Under our Retirement Planning service, you will receive the full financial planning service to plan for your Retirement. This service includes:

  • Quantification of your Retirement goal
  • Your personal Risk Profile Analysis
  • Analysis of your overall financial situation including investments, insurance, incomes, expenses, assets and liabilities
  • Developing the ideal Asset Allocation for you
  • Developing a detailed financial plan including cash flows and making recommendations of investment instruments to achieve your Retirement goal
  • Reviewing your overall existing portfolio and recommending changes as needed

For more information on the Retirement Planning Service from PersonalFN, contact us at (022) 61361200 or write to us at info@personalfn.com. Taking the advice from our team of financial planners, who work as Financial Guardians may enhance your chance of enjoying your golden years of life with peace of mind.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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