Ensure your finances work as you ease into retirement years

Many people, who belong to the happy generation that worked in the post-1991 era, are financially well-placed but unsure about financial planning.

Several have built wealth over time, and navigated the world of investing to the best of their abilities, leaning on friends and relatives to learn the ropes. What should they know about personal finance at this stage of their careers?

First, it is important to recognise the peaking of one's income. A middle-aged professional should recognise that the return on the human asset is subject to risks, which can increase with age. Retirement is the most obvious risk, but economic cycles can create issues of job loss, retrenchment and lower increments.

Sportspersons, film stars, and media professionals may find that younger people encroach into their domains and render them less valuable. Poor assessment of future income has led many yesteryear filmstars to live in old-age penury.

While some professions may be based on reputation built over a lifetime, others may not be able to attract a consistent clientele with age. If you are 40, map your income realistically 50 years into the future, building in directorships and CEO positions you aspire for, with a good dose of realism. Not everyone finds an alternate profession easily.

Second, get real about the damage inflation can inflict over long periods of time. The key thing to remember is that the 'safe' bank deposit will provide a fixed and flat interest income, while expenses will compound over time at the rate of inflation.

If the calculations are too complex to comprehend, use a simple thumb rule: at an estimated inflation of 7-8%, your expenses will double every 9-10 years. This means your corpus should double every 10 years for you to stay above water. There are only two ways to deal with this problem.

First, save as much as you can in the years in which your income is higher than the expenses. Second, invest the savings in an investment that grows at least at the rate of inflation. At 50, when you already have a house and a car, and have reached the peak of your career, you should be saving 50% of your income. Put this to work for a later date when income falls and expenses move up.

Third, take a hard look at your assets and allocate them for future use. If you have a house that you live in, and a few deposits, shares and mutual funds, map these assets to your needs. The house will save you rental expense in the future.

The other assets should also have an identified use—your child's higher education and marriage, your international travel plans, your need for investment income when your regular income falls, and your need to leave behind assets for your children. Every asset should have an identified purpose and a possible time at which it will be liquidated or given away. Don't simply build assets and hope it will be fine.

If you leave your spouse with a large house and no income when you are gone, you may not have provided sensibly, even if that was your intention. Write down what you own and how you plan to use it. If the rent from your second house is supposed to fund your travels, put it down.

Fourth, divide your investments into three portions. The core portfolio is something you will need as long as you are alive, and its only purpose is to provide for your needs. You should lose sleep if this core is lost, erodes in value, or is inadequate.