The unknowns in retirement planning

By Larissa Fernand |  24-02-20 | 
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About the Author
Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

Without much ado, I am going to suggest something that can rub you the wrong way: Do consider the expertise of an experienced financial adviser when it comes to retirement planning.

At the risk of sounding preachy, I would like to remind you that retirement planning is way too complicated for simple rules of thumb. And the real world is not very accommodating of our assumptions.

Here are some unknown variables that we must confront when we plan our retirement kitty.

  • Burgeoning Medical Expenses

Many fail to plan for health conditions and often don’t think about the possibility that they may not be as healthy down the road as they are today.

No one likes to imagine a day when they might not be able to care for themselves. But for many, spending your later years in an assisted care facility or nursing home or employing special help at home is a reality.

Also, don’t forget dental expenses.

  • Inflation

Inflation is the general rise in the cost of services and products. While everyone uses a fixed inflation rate to plan for retirement income, inflation in real life is never that predictable nor static.

What if you get hit by double digit inflation for several years early in retirement? That could cause a higher than anticipated drawdown and severely reduce the corpus.

A common error is that we fail to take into account the inflation impact on our lifestyle. The official inflation index may not rise by much, your expenses could.

Think about the cost of a visit to the salon, the price of a movie ticket and a tub of popcorn, the cost of dry cleaning an outfit, a meal in a fancy restaurant, salaries of the househelp, and so on and so forth. See how they have risen over the years.

So when considering inflation, take into account that it could be much higher. It is your standard of living that rises over the years, and you may want to sustain it during retirement.

  • Investments and Taxes

What is the return you will get on your investment? We all go with estimates, but at the end of the day, it is just that: an estimate.

Who knows the interest rate trajectory?

Who knows the future of tax policy and its implications for investors? You may invest in the Public Provident Fund, or PPF, based on the fact that it is exempt from taxes completely (EEE). But the future is unknown. Take dividends. They were not taxable in the hands of individuals, but that has changed.

Who knows if the companies you invest in will go bust?

Don’t assume that once you retire you won’t be paying taxes. I personally know people who pay taxes during their retirement. It sucks, but that is reality.

  • Life span

How long will you live? This is such a huge factor in knowing what the size of the retirement corpus must be, and yet there is no way we can know this.

In 2016, the World Bank stated that the life expectancy for India was 68.56 years. But that is a generalization across the land. Do not consider the average. In all probability, you who are reading this may live till 88 years of age.

If you live over the top now and save less than required, you could find yourself old and broke. Scrimp too much now and you might never really enjoy life and the fruits of your labour.

Besides providing for your daily needs over this life span, you will have unplanned and unavoidable expenses. I remember reading a report of American retirees who stated home repairs and dental expenses were the most unexpected financial shocks.

The most difficult problem in finance, says Nobel Prize–winning economist William Sharpe, is knowing how to strike a balance between having enough income to meet your current needs and having enough to get you through your lifetime. He calls this the “nastiest, hardest problem in finance.”

In our next article, we shall look at what you can do to combat these uncertain variables, to some extent at least.

But before I end, I want to leave you with the flip side. There is a positive.

Once you retire, even if you do pay tax, the amount would be much less than what it is now. You will have no loans to service, no longer have to worry about keeping money aside for your child’s education, you are no longer saving huge amounts for retirement, and you no longer spend money travelling to work. So it need not be that depressing a scenario.

What you have to figure out is the lifestyle you plan to lead. One individual might just want a car, you might want a Mercedes Benz. Another might be happy with clothes off the rack, you might not want to let go of your branded clothes. Yet another might be content with home cooked food, but you want to regularly check out the latest restaurants. In that case, ensure your savings plan accommodates for such a lifestyle. Take some time to map out what your expenses may be in retirement, and to make sure you're accumulating enough to support them.

Add a Comment
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Jay M
Feb 28 2020 03:03 AM
 Nice.
bhaskar aglave
Feb 24 2020 07:47 PM
 Thanks. More such articles please.
You have been writing very useful articles lately. Appreciate your efforts. Keep it up. Bhaskar Aglave
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