Are you planning for retirement the right way?

Published: July 7, 2020 at 10:19 am

Retirement planning is the hardest exercise in financial planning or in other words making sure we are heading towards an adequate retirement corpus that will outlive us. There are many unknowns and uncertainties while planning for retirement. A good plan is essential to counter these. Also essential is a yearly review and recalculation of the retirement plan. This is a list of factors that need to be considered while planning for retirement.

While planning for retirement, all we can do is to find out the corpus required to maintain current lifestyle after discounting school fees and EMIs which would not persist in retirement (hopefully!).  And lifestyle changes every year.

This seems to only have a positive connotation, where imagine a better car, a better phone, a better TV and the like. While this is true, it also refers to changes in health and physical ability. Additional tests and medical expenses. Just this since fact alone is enough to recalculate the retirement plan every year and account for changes.

First, we need to ensure we are planning for retirement the right way. That is we need to account for as many possibilities and uncertainties that the margin of error in the corpus estimate is reduced as much as possible.

Most retirement calculators use a single return entry to account for pre-retirement planning and a single return entry for post-retirement. As long as it accounts for inflation and the input is a reasonable, realistic one – min 6%, preferably 8% – this is good enough for a first-time ballpark estimate.

Soon we realise that we have different kinds of asset classes – tax-free debt like EPF, PPF, taxable-debt like debt funds and FDs, debt with an income component like NPS, stocks, equity MFs and so. So they would need to accounted for individually with separate growth rate assumptions. The pension from these products should be accounted for.  Rental-income and other sources should also be included. This can significantly reduce the total amount to be invested today.

Then, the retirement corpus would need to be divided into several buckets – an income bucket with cash, pension and safe, liquid debt; a medium risk bucket and a high-risk bucket.

The asset allocation before retirement has to be varied to lower risk. That is, the equity allocation should be reduced well before retirement. This must be included in the plan from day one, else we might end up with a lower corpus. Why? If we assume a return of 12% from the entire portfolio (many assume more) and start lowering equity, there could be a return mismatch resulting in a lower corpus.

Those who are close to retirement should evaluate if they have a large enough corpus. That is, large to divide it into buckets and drawn an income from it or buy a pension plan, invest the rest and hope for the best. It must also factor in a robust strategy to handle the sequence of returns risk.

The search for answers to the above questions led to the Freefincal Robo Advisory Software Template. It accounts for pension income, retirement buckets, a gradual decrease in equity before retirement and tells you if your corpus is large enough to adopt a bucket strategy The bucket strategy conservatively assumes risk-free return for the first 15 years in retirement mitigating poor returns risk after retirement.

Once we have done our best to account for known risks, then and only then should we evaluate our retirement once a year. Redo this calculation and find out where we stand.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
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