4 retirement planning blind spots

Mar 10, 2021

No matter how diligent we are in our retirement planning, blind spots can work against us and sabotage our efforts. To make sure progress is not hindered, along with Yan Barcelo from Canada, we caution you with 4 retirement planning blind spots. 

  • You are forced to retire early.

Morningstar Investment Management’s head of retirement research David Blanchett points out in his report The Retirement Mirage, that choosing when to retire is one of the single most important financial decisions we make in our lives. Because it is this factor that helps determine how much money we need to save, where it must be invested, and our standard of living in the meantime.

But expectations don’t always match reality, and even the most well laid out plans can go horribly wrong. There could be health issues or retrenchment and the impact can be severe.

Imagine the negative implications on your retirement plan should you be forced to retire four years ahead of schedule. If you delay retirement by just 12 months, you have got one more year to save, one more year for your assets to grow, one more year of contribution to the EPF, and one less year to worry about retirement. Early retirement does the exact opposite. And you probably end up in a situation where you're not going to have enough saved, because it is in those last few years that people really turbocharge their savings.

If one retires early and lives longer, it’s a double whammy. Which brings us to our next point.

Why early retirement is a wrong goal  

  • You may cross 100.

Sandra Tsing Loh once said with a dose of humour, “In 1900, the average life expectancy of a U.S. citizen was 48, so most menopausal women were dead, which is not a great place to be.” Though spoken in jest, it pointed to an important blind spot and largest risk related to retiring: the longevity risk.

According to a World Economic Forum report, we better be prepared to blow out over 100 candles on our birthday cakes. Those born in 1947, have an average life expectancy of 85 years, it goes up to 103 for those born in 2007. According to MacroTrends, the average life expectancy in India in 1950 was 35.21 years, it is now 69.96 years. But if you have not suffered from malnutrition and are in good health, the average is no indication.

According to Philip Petursson, chief investment strategist and head of capital markets research at Manulife Investment Management, “Longevity risk is largely underappreciated”. He adds that someone born in 1947 needed roughly 50% more capital than a person born in the previous generation, and for someone born in 1977, the extra capital needed is about 30%.

With the longevity risk comes a shortfall risk: the possibility of outliving one’s savings. In fact, to cover for the longevity and shortfall risks, and considering that 94 years is an average life expectancy, one should develop one’s retirement plan with the expectation of living to 100. “Our findings suggest that given this uncertainty around retirement age, some investors may need to double their current savings to achieve their retirement targets. A person’s retirement age is simply too unpredictable, and we must plan accordingly to help avoid negative surprises,” Blanchett says.

Kickstart your retirement savings in 2021  

  • The health curveball.

Morningstar’s director of personal finance, Christine Benz, sums it up well.

You often read about all the money you'll save when you're no longer working--on dry-cleaning, commuting, lunches out, and not having to save so much for retirement anymore. Given that cavalcade of savings, it's not surprising that so many retirees fall back on the conventional wisdom that they'll only need to replace 80% of their income during their working years when they actually retire. In reality, that is at best a rule of thumb; some retirees actually spend more than they did while they were working, while others spend much less. Healthcare costs are one of the biggest wild cards.

One area where expenses can definitely explode: intensive care for the last period of one’s life, which could range from a few months, to a few years. “That is a huge expenditure,” highlights Munro, adding that the last third part of one’s life will probably not be a beach party.”

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.

Is Rs 1 crore sufficient to retire?  

  • Not looking beyond finances.

There is the financial aspect, and a psychology hurdle to jump with respect to it. “Even retirees who are seasoned investors will tell you that transitioning from accumulating to spending from their portfolios is a challenge. After years of saving, transitioning into drawdown mode can feel a little bit scary," points out Benz.

But don’t stop there. Retirement is not only about achieving a financial number. One’s social and emotional health also need to be considered. It is now an established fact that people who have a strong network of relatives and friends age better. You must have clarity on what you are retiring from, and what you are entering into. It would be a shame to arrive at retirement financially secure but face an existential crisis.

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ninan joseph
Mar 14 2021 12:45 PM
The debate of retiring but financially secure vs existential crisis is never-ending. However, the fact of the matter is that everyone will retire or will be forced to retire. The way business is run has totally changed from the time when my father worked, I and my children will work. The management style of co is - no one is interested in staff who worked long, earlier if a person worked for more than 20 years, he was looked upon as a senior, now, the same person will be looked upon as if he/she is a dinosaur. Management will keep churning the staff, just like our cricket team. Ravi Shastri keep saying it is a good headache to have. Hence it is imperative for everyone to ensure that you plan for your retirement.

This is where your article on retirement is important to the younger working generation.

You cannot think of everything in life and plan it, however, do everything you can when you can so that you do not regret it later.

I fully agree with all of the above and wish to add one additional point. In India, insurance is restricted to in-patient. However, retirees have to also think of having a steady income to pay for their normal lifestyle medication like diabetes, cholesterol etc. The cost of medicines is increasing and if you have one or two member of family having lifestyle diseases, then visiting a doctor, blood test, and buying medicines will be an additional burden. Health is indeed wealth.

I have read experts talking about emergency funds, term insurance, medical insurance, but never heard of someone writing about the need to build a smaller corpus that cannot be touched and its income to be used exclusively for regular doctor visit, xray, blood test, regular medicines etc. Just having diabetes, blood pressure and cholesterol which is the most common disease will create a big expense for a middle-class family in India. Also once you retire, you feel like going to a private hospital for basic comfort than Govt hospital.
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