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Retirement – Financial planning (XII)

Today we will take up some of the issues and the factors to consider in financial planning during phase III, which, you will recall, is…

Today we will take up some of the issues and the factors to consider in financial planning during phase III, which, you will recall, is the range covering years 31 to 35 of working or business career.

Phase III realities: Let us refresh our minds to the realities and tasks ahead of persons in phase III. The first thing to be aware of is that all the transition phases are quite fluid and should be seen within our individual realities. For instance, some people may work for sixty years in their lifetime while others may do that for only thirty. Hence, the phases will be longer for the former and shorter for the latter. Similarly, different individuals achieve differently in the same phase. Consequently, our actions must be adjusted in the various phases to our individual realities. These two factors suggest that we can benchmark but should not ‘compete’ with others. Instead, the pressure we should subject ourselves to should be towards competing with ourselves and doing the best that we can in each phase.

The tasks during phase III should be about settling on what we want to be doing during our retirement and consolidating our achievements (read: investments) during the last two phases. As mentioned, we could still be lagging during this phase. If that is the case, we must roll up our sleeves and work smart and hard to achieve outstanding investment and income objectives. With our experiences on what works and what doesn’t and our network of relationships, we can achieve a lot within this phase. If, on the other hand, we are on track on our investment plans, then we should begin to see the returns on our investments supporting us comfortably as we may desire in our upcoming retirement. But regardless of what our financial status may be, we should strive to consolidate and continue to build our asset base in this phase even if that means downgrading some initial objectives. Remember this is a point we have to be particularly on the watchout for both about our finances and physical and mental health.

It is the same investment options: As mentioned, the objective of everything we should be doing in this phase revolves around building our investments further and consolidating them to smoothen any rough edges. However, it is the same investment options in the earlier phases that are also available in phase III. The only difference is an emphasis on the less risky ones. Consequently, we should remain focussed on the investments (financial and physical) we started with that are doing well and have the prospects to remain thus.  But it is also possible that new investment outlets might be thrown up due to developments in the local and/or global economies. When such opportunities open, and we are in phase III, we will need to be cautious about how we seize them. We should understand them as quickly as we can and take advantage of them in ways that do not jeopardise our overall portfolio performance. By the way, those in phases I and II can be ‘more adventurous’ in seizing these same opportunities.

To enable us to consolidate and build our asset base during this phase, I think the following are important:

What you should be doing now: You must start this phase with a clear knowledge of your financial state. This means knowing the following:

  • What you own and the general structure of your portfolio – This means being clear about the various assets in your portfolio and which ones belong to which group. Whilst we may have a preponderance in one type or group of assets, such as land or equity, it is wise to have a reasonable spread in other groups as well. ‘Reasonable’ though does not mean spreading out your investments too thin in too many asset groups.
  • What are your best-performing assets, how much you are making out of them in income and what their capital appreciation has been – This means we need to understand how each asset is doing; When we bought into it, for how much and how much we got in income from it and how much we could gain on our investment if we were to liquidate it now.
  • Clean your balance sheet – From time to time, we will find out that some assets are not doing well and may not do any better in the future. In such cases, it is just better to liquidate them and move on. It doesn’t matter that sometimes this happens at a loss to us. We should move on!
  • What you owe; when the obligations will be due and what is their source of repayment – How much we owe has a bearing on how much we can make on a net basis from our other investments. Generally speaking, whatever we owe should be in an asset that is generating more income than the cost of the debt that we owe. As with lacklustre assets, however, expensive loans should be liquidated.
  • What your expense structure is – As with all phases, particularly in phase III, we need to be crystal clear and on top of what our monthly and annual expense structure looks like. This means we must know what our monthly and annual spendings are.

We have so far seen some of the types of investments that we can consider during the various phases. However, the perceptive follower would have observed that we have not worked out any numbers yet. So, next week we will take up ‘How Much Do You Need?’ before we go into managing our finances in retirement.

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