Pre-retirement stage

The workbook divides retirement planning into three phases, and the middle one is the one clients arrive at unprepared.

1. Preparation stage — the working years. Its concerns are the need for child education, buying a house to live in, adequate life and health insurance, and recognising the impact of ageing.
2. Period of Initial Retirement / Pre-retirement stage — the transition. The workbook characterises it as the phase in which physical and psychological changes will happen and one gets familiarised with the retirement regulations and procedures.
3. Final Retirement — the phase in which all necessary arrangements should be complete and the retiree is in a good position to decide about their life.

Notice what the pre-retirement stage is not about. It is not primarily about accumulating. Accumulation belongs to the preparation stage. This phase is about learning how the money will actually come out.

Why the rules and procedures matter here. The decisions that get made once and cannot be undone cluster in this phase: which annuity payout option to elect at the vesting age, whether to take the permitted lump sum, whether to transfer or withdraw an old EPF balance, how much of the NPS corpus may be taken as a final withdrawal. Each has a tax consequence and each is irreversible.

Why risk appetite changes here. The workbook states the principle that governs this stage: investors may be willing to take higher risk in the accumulation period for higher return, but in the distribution stage of retirement the ability to take risk with the savings will reduce. Protection of capital becomes important because the opportunity to add to the corpus after retirement is limited. The pre-retirement stage is where that shift in the portfolio is executed.

Why pre-retirement withdrawals do the most damage here — and earlier. The workbook quantifies it: withdraw Rs 75,000 from an EPF balance with 30 years to retirement, at 8.5% a year, and you potentially lose Rs 8.66 lakh of retirement corpus. Its conclusion is that any withdrawal from retirement funds well before retirement has a detrimental impact, and that falling short forces the client either to postpone retirement or to reduce lifestyle so that the money lasts.

The adviser's role. Chapter 6 lists what the adviser advises on precisely at this juncture: when to take employer benefits, which pension distribution choice suits the client, whether an annuity is suitable, what withdrawal rate is appropriate, how much should be in guaranteed investments, and whether to pay off the mortgage before or during retirement.

Mr Pillai is 56 and retires at 60. His position:

What the preparation stage already settled. The corpus is built. Nothing he saves in the next four years changes the outcome materially — at Rs 50,000 a month for 48 months he adds Rs 24 lakh to a Rs 1.44 crore base.

What the pre-retirement stage must settle.

• The glide path. His Rs 48,00,000 of equity has to move towards capital protection before the corpus starts being drawn. A 30% fall in the first year of drawdown on Rs 48 lakh is Rs 14.4 lakh he can never earn back.
• The NPS decision. Under the workbook's summary, the final withdrawal is exempt up to 60% of the total corpus, and no tax is charged on the amount used to purchase an annuity. On Rs 34,00,000, that is a choice worth understanding before the form is signed, not after.
• The EPF decision. He has well over five consecutive years of service, so the withdrawal is tax-free. That is settled — but only because nothing was withdrawn early.
• The annuity payout option. Lifetime without return of purchase price pays the highest annuity; lifetime with return of purchase price pays the lowest. This is elected once, at vesting age.

Four years to learn four decisions. That is what the phase is for.

Chapter 4 (Retirement Planning Basics), section 4.1, names the three phases and describes each; Chapter 6 supplies the adviser's role, the withdrawal arithmetic and the transfer decisions that live in this phase. Expect a question asking which phase a described concern belongs to — child education and insurance are the preparation stage; getting familiar with regulations and procedures is the pre-retirement stage.

• Three phases, in order: preparation, pre-retirement (initial retirement), final retirement. Naming only two loses the mark.
• Child education, house purchase and insurance belong to the preparation stage, not to the pre-retirement stage — the classic swap.
• Pre-retirement is not the same as the accumulation stage. Accumulation and distribution are the two corpus stages; these three are life phases.
• Ability to take risk falls in the distribution stage, so the de-risking happens in the pre-retirement stage, not after.
• A pre-retirement withdrawal is not neutral. Rs 75,000 taken 30 years early costs about Rs 8.66 lakh at 8.5%.
• Falling short has only two remedies: postpone retirement, or reduce the lifestyle the corpus must fund.