Retirement is a significant phase of an individual’s life. It is after decades of hard work that one finally calls it a day. People look forward to this time, as, after years of responsibilities, they can finally live the life they want. It can also be difficult for some people, as after years of getting a paycheck every month, they now have to manage it completely on their own. This sometimes leads to people suffering unexpected financial problems and going through unexpected turmoil. This is because the lack of a proper retirement plan can lead to them existing their savings and investments.
Irrespective of whether you worked for a huge corporation or were self-employed, the life that you will live after you retire depends on how you planned it while you were working. There is no particular age when you should start planning your retirement. The earlier you start, the easier it is to plan and achieve your financial freedom. Use a retirement calculator to get an estimate of the funds you need as per your individual lifestyle and spending habit. Once you have collected sufficient funds and you can retire in peace, comes the question – how will you be spending your retirement money? Here is a 30:30:30:10 rule that several individuals who retire swear by.
The 30:30:30:10 rule for retirement
The 30:30:30:10 rule is a simple way you can go about navigating your retirement fund. It allows you to bifurcate your fund allocation beforehand so you know the limit you can spend on each aspect of your retirement. This specific allocation allows you to meet all your retirement needs without overspending. Based on the bifurcation, you will also be able to plan your savings and investments. This rule will ensure that you meet your different retirement needs, be it the immediate ones or the ones you will need later. Here is how you use the 30:30:30:10 rule for your retirement planning:
30% for your current use
When you retire, taking care of your own expenses without having a monthly stream of income can be difficult. Along with your usual spending, you also need to consider the funds you will require for unexpected expenses that may arise. This would simply include any travelling, any repair in your house, or any such unexpected expense. This 30% is for taking care of your current needs when you have retired. It ensures that you live your everyday life with financial ease. For choosing an investment to allocate to this part of your retirement plan, it is advised to go for income-bearing debt funds. This is because debt funds are safe to invest in and the income-bearing feature of the investment ensures that you will receive a monthly payout. This monthly payout will be useful for you to take care of your everyday expenses.
30% for your future
Once you retire, you will receive no fixed paychecks like you used to. However, the everyday expenses in life do not come to a standstill. Also, it is important to ensure to take inflation into consideration. This is because, over the years, the prices of goods and services rise and so will your necessities. Allot 30% of your retirement fund towards your future. This allows you to live the life you want with ease and also fight inflation. Since it is for your future, you can take a moderate risk-moderate returns approach by investing in a hybrid fund. Hybrid funds provide a blend of equity and debt in a single plan. This part of your retirement fund will help you beat unexpected crises like inflation.
30% for children
If you have children or any members in the family for whom you want to leave an inheritance, allot 30% of your fund towards them while retirement planning. This ensures that your loved ones receive your legacy after you. You can invest this part of your retirement in equity completely. Look for stocks or mutual funds that provide significant returns in the long haul. Your children will thank you later.
10% for emergencies
The last 10% of your retirement fund is purely set for emergencies. This includes any unexpected medical diagnosis or family emergencies that may arise once you have retired. Due to the uncertainties of life, it is crucial to have an emergency fund to ensure that you do not find yourself in financial distress during tough times. Since this part of your retirement fund can be needed anytime during emergencies, it is advised that you put them in liquid assets.
The above 30:30:30:10 is not a holy grail that every individual who is retiring has to follow. Instead, it is a blueprint from which you can plan your retirement. Take your retirement goals and needs into consideration while drafting a retirement plan. Use tools like a retirement calculator to get the numbers you need while planning. Doing so ensures that you live a stress-free retirement life.