I am not an expert on retirement and planning for life after sixty (if that is what defines the term ‘retirement’).
I am also willing to bet that anyone who has never retired can never be an expert on this subject (you can only be an expert in things you do), however sagely an advice he/she can offer on how to plan a life after retiring from active work.
But in planning and working towards my own retirement, here is one big mistake I see most retirees (and to-be-retirees) make and how it can be a such a dangerous mistake.
I’ve never heard it mentioned by retirement experts. Nor have I read a word about it in retirement books.
Everyone talks about saving money and allocating it well so that you accumulate enough to spend through the 20-30 years of your post-retirement life.
This is a good advice, but one that misses a big point.
That one big point that most retirement plans miss, and I believe is a grave mistake, is that of giving up all active income after retiring from work.
When I say ‘active income’, I mean the money you make through your work or through a business you own. Passive income refers to the income you get from your investments or rental income from property.
Now, you can increase your active income by working more. But the only way you can increase your passive income is by getting higher rates of return on your investment.
So when you give up your active income, two bad things happen:
- You lose connection with your active income, and it’s very hard to get it back with each passing month.
- You see a decline in your ability to make smart investment decisions because of your dependence on passive income.
Idea of Retirement
The idea of retirement that is sold to everyone is wonderful….
Just put a portion of your income into an investment account for 20-30 years and then withdraw from it for the rest of your life. Once you retire, you won’t have to work anymore. Instead, you will fill your days with fun activities like travelling, golfing, going to the movies, and visiting the kids and grandkids.
But consider this: A retirement lifestyle for two, like the one I described above, costs around Rs 3 lac a year currently (Rs 25,000 per month – a conservative assumption for life in a city/town).
In the next 20 years, assuming an inflation of 10% per year, this is going to rise to around Rs 20 lac!
How big of a retirement account do you need to fund that?
Let’s assume that annual inflation remains at 10% for your 20 years after retirement, then the total investment corpus you must have at 60 (when you retire) is around Rs 13 crore.
Now this does not assume exceptional items like a big healthcare costs you may have to incur in old age (given our lifestyles, the probability is high!).
Anyways, some more basic math tells me that if you are my age, i.e., 35, and have zero investments to start with, you need to invest a minimum of Rs 40,000 per month at an annual return of 15% to reach the Rs 13 crore target over the next 25 years i.e., till the age of 60.
Saving Rs 40,000 every month is a big deal for most of us. Over that, getting 15% consistently over, say, 25 years may not be impossible, but it’s difficult given the way most of us invest (recklessly).
Feeling down and depressed reading all this? Don’t be!
There’s a way you can start working on your life after sixty that’s going to help you immensely – financially and emotionally. And that great way is to…
That’s what a Johnnie Walked ad campaign tells me. In the context of the retirement plan I am talking about, you can change this to – Keep working.
Instead of relying on passive income to keep you and your house running after retirement, a better plan is to also work toward creating an active income to support you in those years.
After all, I’m sure you don’t want to spend your retirement days studying the market and your evenings worrying about your investments.
What is more, when you keep earning money from your work, you would continue to feel good throughout your retirement years.
You see, retirement isn’t supposed to be filled with money worries. And yet, that is exactly what you are planning to do by planning to stop earning active income after sixty and thus wanting to get above-par returns on your investments now.
There is no point in searching for stock tips that will earn you 20-30% returns per year for the next 25 years. Such stocks don’t exist. Even if they exist, you are only going to find them in hindsight, or from someone who has already made his money on them.
Don’t get me wrong here – I am not against investing for retirement to create a stream of passive income. That’s very important, and something you must do.
But what I’m trying to say here is that relying only on your investments / passive income can be a dangerous strategy.
“Retire at 40 and travel the world” is a nice dream to have, but one that may lead the dreamer to take many a missteps towards that goal – like wanting to earn more money faster.
Claim Your Retirement
There are many ways for a retired person to earn a part-time, active income.
You could do some consulting, tutoring, start your own online business, blogging, or earn money doing any sort of purposeful work.
For instance, apart from Safal Niveshak, here are a few ideas I am working on to keep doing purposeful work and let the active income coming to me throughout my life, whether I am forty, sixty, or eighty –
Apart from these, there are several other ideas that I plan to work on to create more active income streams for the rest of my life.
You see, I am not saying that you should give up on the idea of retirement. On the contrary, I’m saying that retirement might be more possible than you think.
But it’s important for you to replace the old, faulty idea that retirement means living off passive income only.
Imagine a new picture of what your retirement can be: a life free from financial worry that includes lots of travel, fun, and leisure, funded in part by active income from doing some sort of meaningful work.
The first benefit of including an active income in your retirement planning is that you will be able to generate more money when you need to.
But the other benefit – and no one talks about this – is that it will allow you to make wiser investment decisions because you won’t be a slave to your investments.
You got my point, right?
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