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The 30:30:30:10 rule of saving for one’s retirement

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A friend who had just retired called. She was wondering how she should use her retirement corpus. I have a long list in mind she said, and I began to panic. Like what I asked? Renovate my home, buy myself a new car, take some much postponed trips and may be buy some jewellery, she said. What about investing? She was not sure if that was even needed. For a single woman living in her own house, what could go wrong, she asked. And then we began that long conversation.

My friend is not dumb. She held a fairly senior job that paid well before she retired. She won’t be earning a pension, but that does not bother her much. She suffers from the syndrome many of us can identify with—the inability to spend.

She spent most of her life saving for the future and for her only child. Though she was not stingy, she was surely frugal. Postponing many large expenses to fund her child’s education and meeting any contingency, she was careful and cautious with her money. Being a single parent made her even more paranoid.

Now she feels a sense of freedom and entitlement. Her child holds a good job, and is well educated enough to take care of herself. She lives in another city and in a classic role reversal, cares for and strictures her mother for issues ranging from food to health. My friend knows that the daughter needs no more financial support from the mother.

However, she wouldn’t accept that position easily. She recalls how she began her life with her back to the wall, with no assets or inheritance to speak of. She would not want it for her daughter. She will leave behind the house, worth a decent sum, and some investments.

So we had one goal on hand. The inheritance. What about routine expenses? She turned my much-repeated advice on drawdown, right back on me. I would use up 3-4% of the corpus every year, she said. That would be a good thing to do, I concurred. But then, if money is meant for the young daughter, and for remaining unutilised in a large part (if 4% is drawn, 96% remains) it needs an investment strategy. Cautious and conservative won’t cut it, I had to remind her. Her daughter is young enough to take risks with equity investments, and the 96% needs to fight inflation.

But then there is the buying list. We had to make an estimate and I returned to my favourite argument of 30:30:30:10. A rule I freely offer to anyone who speaks to me about retirement. 30% for the children as inheritance; 30% for your own future to protect from inflation; 30% to spend and use and live the retired life; and 10% for emergencies.

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Periodic withdrawals from long term retirement products like the NPS, EPF, PPF jeopardise your retirement goals. That is why experts ask subscribers not to press the withdrawal button on these, barring in extreme cases or emergencies. Such frequent or premature withdrawal is just one of the mistakes that can hurt your retirement goals and plans. Here are other money mistakes that will adversely impact your retirement and financial well-being in old age.

The 30% meant for inheritance can be in equity; the 30% for the future could be in a hybrid product that has equity and debt; the 30% for spending needs to be in income bearing debt and the 10% for emergency should be in liquid assets. So that is the asset allocation. The house is not included in this computation.

We decided to make a list of 10 investment products to make this allocation. All diversified, good quality, well run funds, stocks, bank deposits, debt and liquid mutual funds. Track record and management quality matters to most to a retiree that does not want to keep monitoring what is going on. No tactics of moving in and out, and juggling things for my friend. We kept it simple.

But what about the buying list, she persisted. I told her that she needs to find the funds. Where will she draw from? She does not want to touch the money she kept for her child; if she drew from the corpus for her own future, she risks outliving the money; if she draws from the current spending portfolio she will eat into its corpus and get less than what she needs for routine spending. The emergency fund cannot be touched except in well, an emergency.

You fooled me, you wily woman, she quarreled. Don’t I deserve to enjoy the wealth I created all these years? We can pool a little from all the three portions, I suggested. She seemed reluctant. And then the doorbell rang.

The service engineer for the air conditioning units had arrived. He had declared just last week that the units were too old and needed replacement. He was now here to offer a plan and project costs and timelines. My friend stared at me, and I held back my comment. After quoting a princely sum, the engineer left. Let’s rework and assign a sum that won’t go into any of the buckets. Let’s call it the retiree’s indulgence basket, she laughed.

And then the penny dropped. Do you…

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