Seven Steps towards In-Retirement Cash-Flow Needs EstimationRetirement leads a person into a completely different phase of their life. The most critical aspect of retirement is the management of finances because the person is likely to see some massive changes in the sources of their income and expenditure. The goals of a retiree’s life are also different, and the approach towards planning for the future varies from what it was before. A systematic strategy can ensure a constant and adequate flow of funds for a retiree. However, the first step towards this is the estimation of funds that will be required during the retirement phase. Several costs have to be taken into account, and the following steps can be instrumental in cash estimations:
- Estimation of Basic Expenditure
- Taxes, Debt, and Insurance Costs
- Medical/Hospitalization Bills
- Miscellaneous Expenditure
- Contingency Fund
First and foremost, an individual needs to estimate the amount of money that will be required to meet their daily needs. The essential expenditures will include funds needed for food, clothing, fuel, entertainment, travel, children’s education, special occasions, etc. These, in turn, will be determined by the kind of lifestyle one would prefer after retirement. A more modern lifestyle will automatically increase the cost of living compared to simpler living standards. In addition to this, the place of residence will also be an important determinant in the cost likely to be incurred in fulfilling these basic needs. An urban location can entail higher expenditure compared to suburban areas for the same products. Besides, there are costs that become a necessity when living in a city but can be avoided when living in smaller towns.
Even though some part of an individual’s expenditure may reduce in retirement, several other liabilities are added on. These can include property tax, house insurance, mediclaims, and health insurance. An individual may also be liable to pay taxes on funds taken out of an individual retirement account (IRA), pension schemes, or accounts and plans like a 401(k), 403(b), and 457, along with other instruments being used for retirement savings. Another expenditure that needs to be accounted for is debt payments. Many people take home loans, personal loans, or credit lines. These debts should preferably be paid off before retirement. However, if there is a possibility of these debts extending into retirement, then it is important to save more for them. The equated monthly instalments (EMI) or interest payments that need to be paid should be added in the cash-flow requirements for retirement.
Health expenses can occur at any point in life. But, after retirement, the probability of suffering from an illness doubles. With the increase in age, a person tends to be prone to more diseases due to weakness or a decline in immunity. It, therefore, becomes important to plan for medical and hospitalization expenses well in advance. Money becomes a gruelling factor when it comes to hospitals. Strategically planning this aspect can not only save tension during an already stressful situation but can also save lives, which may be compromised due to a lack of funds. Life after retirement also brings in the need to take certain medication to maintain strength and immunity. These bills or the costs of health insurance must be accounted for while planning.
This is a significant factor that has to be incorporated when estimating future financial requirements. The purchasing power of money is most likely to reduce with every passing year. The reason for this reduction is the ever-increasing inflation. If a person is planning their cash-flow needs much earlier in life, then they need to consider a high inflation index too. The use of the inflation index will allow the person to arrive at a future estimate that will be equivalent to the sum in the current scenario. This calculation has to be done to ensure that the estimate is a realistic figure in terms of future use. However, if an individual starts this planning in their 50s, then a very high inflation index will not be required, and the current estimate will be more or less close to the future requirements in absolute terms.
Another category of expenses that must be included in the estimate is unplanned costs. As these are uncertain and at times, unnecessary, it is hard to pre-empt a fixed amount for them. These costs can include sudden car repair expenses, additional accessories, kitchen items, antiques, house repairs, travel, etc. Some of these might appear small and insignificant when looked at individually, but when consolidated, they can add up to a considerably high amount. It is necessary to keep some funds aside to meet such spontaneous and unplanned costs.
Each individual must make a budget and abide by it. Since a person has limited funds after retirement, budgeting becomes more crucial than ever in this phase. Retirement requires people to live on limited means, and a person who is not used to following a budget can struggle to abide by these rules. When planning for retirement funds, every penny is saved for a specific purpose. When the laid out budget is not followed, the funds can be spent on unprecedented and unnecessary items. A lack of budget preparation can also result in overspending. Thus, preparing and following a budget is imperative to the success of the estimation of funds after retirement.
While budgeting can be helpful to keep finances in order, some expenditures can arrive suddenly and be hard to escape from. For this purpose, it is advisable to keep aside a contingency fund, which can be used during emergencies. Loss of property during a natural calamity, a car accident, damages caused by a sudden fire, or thefts are certain situations where this fund can be effectively useful. Though hospital fees and medical expenses have already been taken into account, they can sometimes go beyond the allocated amount. An emergency fund can, therefore, give you financial strength at the most unexpected times.