How to Prepare for Retirement…

People spend hundreds of precious hours contemplating about how to prepare for retirement. Still people across the world retire like a poor. This happens because they have not asked the right question about retirement planning when in job. Instead of ‘randomly preparing’ for retirement they should have worked towards attaining financial independence.

People should target that they much attain financial independence before retirement. People must realize how important it is to attain financial independence for oneself. If we wait every month for paycheck to pay for day-to-day expenses it means situation is really critical. A very tiny minority can claim to be financially independent.

Do not mistake financial independence with higher salary. No matter how high is the salary; it does not mean that person is ‘not’ dependent on paycheck. Paycheck dependent person can never become financially independent. So, how to prepare for retirement? The best way is to plan is advance to reduce ones dependency on monthly paycheck to zero.

Whom we can call financially independent? Example: Monthly expense of a person is $1,000. He generates $1,000 without having to work for it (no job). In this case the person can be called financially independent. Income which financially independent person generates is like rents, dividends, advertising revenue, interest earning etc. Real lessons of financial independence can be learnt from those people who themselves are financially independent. [It is a common observation that, financially independent people are also rich].

Fat Paycheck does not necessarily translate into Financial Independence. It can of course make the journey faster.

Earning money from job is a challenge. Its biggest side effect is anxiety. We all need money to lead life. Earning money from job has its limitation. The limitation is in ‘freedom’. Salaried people spend 10 hours a day for job. Considering they sleep 8 hours a day, the balance time left is only 6 hours. In these six hours majority can do nothing. What is left are weekends. All that effort to enjoy just the weekends? I know majority of you must be shaking heads in acceptance. Let me ask a more blatant question, are we born to lead life of a labor? Somebody else decides when we can take leaves. Somebody else decides when we can go for vacation. Somebody else decides what we should deliver to earn money. If this is not bonded labor than what is??? I completely abhor it. The hard part is, most of us is leading this life day after day since years. Is there no way out? Yes of course there is a way out, but it’s a slow process. Financial Independence is what can take us out of the perils of doing a monotonous job. But FIRST ACCEPT this fact that attaining financial independence is a slow process. It will not happen in couple of years.


We have become slave to our ‘wants’. For us paycheck has becomes a desperate need. Like a baby is attached to an umbilical chord inside mother’s womb, we are attached to paycheck. Cut the umbilical chord and baby cannot even breathe. But we matured people lean to cut our umbilical chords. It’s a slow process, but we can do it.

A Businessman generating $100,000 per month, cannot not make him financially independent. The more one earns the more one have to work for it. This means the less independent one becomes. High income from service or business can be a good starting point to become rich/financially independent.

To attain financial independence one must start accumulating assets. Suppose one earns $100,000 per month from job. Target a saving $10,000 each month. This recurring $10,000 savings each month can make one financially independent. The balance $90,000 should be used to manage all expenses. These $90,000 does nothing to contribute to financial independence. No matter how higher is this value, it cannot make one financially independence. Financial independence will from the level of savings. Higher savings means faster realization of independence. Higher savings will enable person to buy more assets. So let me ask the million dollar question once more, how to prepare for retirement while still in JOB? Easy answer is, increase the level of savings each year and keep accumulating income generating assets from these savings.

What are assets? Assets generate automatic side income. The more assets you have the more income it will generate. The key to financial independence is ‘automatic income’. This income keeps flowing-in without you having to work for it. I personally devote 200 hours each month to earn my living. This is not financial independence, its bonded labor. But the side income I make from my stocks, bank deposits, rental income, advertisements etc, will continue to drip without I having to work for it. The higher will be my side income the closer I get to my financial independence. I make a pint to re-invest my side income (buy more assets). This further will fasten my journey towards financial independence. In order to prepare for retirement, one must keep re-investing the full side income till one actually retires.

It is unfortunate that neither in school nor in our personal life we are taught about the concept of financial independence. So how to prepare for retirement? Our basics about retirement planning are nearly zero. By the time we realize the need of financial independence is already too late. But people in early forties can still expect to attain financial independence before retirement. The only difference is they will have to save and invest more aggressively.

financial independence

How to Prepare for Retirement? Save money and wait for the opportunity…

Most of us have this problem, when we need money for investment we are paupers. When we should not invest we buy them like kings. We are often taught not let our money lie idle in savings account or deposits. This is not a 100% correct statement. The money we save retirement-linked investments can lie idle waiting for the right opportunity. Do not worry and do not touch this money. Continue adding each month some predefined portion of your savings to this retirement fund. The idea is, when one has the opportunity to buy assets, you should have enough money to buy it. Accumulate more and more assets at undervalued price levels.

Example: Try to see what I am trying to arrive at. Suppose my investment portfolio (shares, deposits, real estate etc) is worth $10,000 and it is yielding income of $1,000 per year. It means my portfolio yield is 10% per annum. But $1000 ($83 per month) is not enough to manage day-to-day expenses. Now, suppose in next 10 years my investment portfolio is worth $250,000. At 10% yield, my monthly income will be close to $25,000 ($2,000 per month). This is a very impressive figure.

Initially with smaller investment portfolio, automatic income may look irrelevant. But if one keeps accumulating assets over a period of time, this automatic will become substantial. Preparing for retirement must be done like this. Start building an investment portfolio from scratch. Target should be, by the time one retires; worth of investment portfolio becomes impressive. To increase size of investment portfolio from mere oblivion to substantial levels, time is required.

Why accumulation of assets is a slow process? Common men can buy assets only from his savings. Assets generates alternative source of income. As the size of assets grow, level of side income also grows. In initial years both, the speed of asset accumulation is slow & level of side income is small. But in later years, more assets will generate higher side income. One must time their retirement in such a way that by the time retirement knocks on the door ones level of investment portfolio has become substantial. How to prepare for retirement in best possible way? Start to accumulate assets from the first month the paycheck in credited into account. This will be ones best chance to attain financial independence before retirement.
Best Preparation for Retirement – Accumulate Those Assets which are Taxes Less

Take a simple example. Suppose you are generating 8% of interest income from fixed deposits. On this income you will be taxed @ 10-30% depending on your tax slab. Which means, my effective return on investment will be will be 5.6%-7.2%. I will loose 0.8%-2.4% for nothing. Suppose, instead of investing in fixed deposit if I would had bought dividend stocks yielding @6% dividend income. Dividend is not a taxable income across the world. The difference of few percentage points can make a huge difference to your financial independence in long term. Other tax friendly options are long-term capital appreciation from equity. Long-term capital appreciation of real estate property is also tax-free.

Know more about where to invest retirement coprus in India





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About the Author

Mani

I am a Blogger with a passion for Investment Education. I started blogging in 2007-08. Those where the early years when I went on the family way.

Blogging didn’t happened to me as a coincidence. It was a very conscious decision. I started blogging as a process to build a new hobby and also learn a new skill of personal finance management.

Eventually this hobby transformed into a passion. I love blogging on the topic of money management…know more…

8 Comments on "How to Prepare for Retirement…"

  1. SANJEEV KUMAR SINHA | June 29, 2017 at 4:14 pm | Reply

    Can I select few good Dividend/Bonus paying stocks from the market & buy some shares as per my budget & wait for the corpus to auto generate for a period of 12 years on the “Compounding magic”? Will I be able to achieve my target of accumulating some retirement corpus with such passive investment method? Pls advise.
    Thanks
    Sanjeev Sinha

  2. SIR, I AM 52 YEARS OLD, I HAVE FEW YEAR LEFT IN MY CAREER . AFTER READING YOUR ARTICLE , I FOUND IT IS MOST BENEFICIAL TO ME .. , RIGHT NOW I CAN AFFORD TO SAVE RS 20000 A MONTH , PLEASE SUGGEST ME A SCHEME FROM WHICH I CAN GENERATE THAT INCOME AFTER MY RETIREMENT ..SO THAT I WILL BE FINANCIALLY INDEPENDENT . YOUR ADVICE WILL BE HIGHLY APPRECIATED . SINCE I DONT HAVE TIME TO DO MUCH RESEARCH IN THIS AREA RIGHT NOW. I WAS THINKING MUTUAL FUND AND ULIPS ARE ALL CHEATING SCHEMES , AFTER EXPERIENCED THIS 2 ITEMS .. MAY BE THAT TIME MY BAD LUCK . IF YOU HAVE A BETTER IDEA SPECIFICALLY . PLEASE SHARE.

  3. I WAS THINKING ABOUT RETIREMENT , SINCE I AM ALREADY 52 YEARS AND THE WORK IS VERY STRESSFUL IN INDUSTRY ..I AAM REALLY ANXIOUS ABOUT MY INCOME DURING RETIREMENT LIFE.. HAD SOMEONE TOLD IT TO ME EARLIER IT COULD HELP .. BUT NOW IT SEEMS VERY LATE.. I PUT ALL MY SAVINGS IN FDS , WHICH I THINK IS NOT A RIGHT IDEA, BECAUSE OF TAXES INVOLVED .. AND I DON UNDERSTAND ABOUT SO CALLED EQUITY FUNDS. DOES THAT TERM MEAN INVESTING IN STOCK MARKET OR MUTUAL FUND?? , MUTUAL FUNDS .. ALL NAV DEPENDENT HOW IT BENEFITS ? IF THE NAV IS VERY LESS AT THE CLOSING STAGE??

  4. VISHAL THUKRUL | September 2, 2015 at 9:01 am | Reply

    MOST IMPORTANT THINGS IN LIFE I CAME TO KNOW AFT READING THESE ARTICLES. THANKS A LOT FOR SUCH PRACTICAL ADVICES THROUGH THIS BLOG.

  5. yeah thats right. Once I accumulate good corpus, which will remove my dependency on salary, I would utilise the same by opting for dividend options in equity funds so that my monthly expenses are taken care off. Also the excess of profit, I would move int to PPF, once I renew PPF subscription for block of 5 years, which would take care of fixed income component in my portfolio.
    To diversify my portfolio, I wish to add real estate inorder to generate good rental income. However being a big ticket investment, I think I will have to postpone my decision of buying the same.

  6. I am planning for early retirement by the age of 40 itself, for which I am aggressively investing in equity funds. Also once I quit my full time job, I wish to generate passive income from dividend option, through SWP

    • Keep it up.
      Just an advice: focus on ‘real income generation’.
      Example:
      – Dividend is real income. Start seeing dividends dripping into your bank account. Calculate portfolio yield. Work to improve this yield.
      – Capital Appreciation is only virtual gain till you sell your holdings…

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