Whenever I use my retirement planning slide deck to explain the importance of retirement planning, I get a few comments: “It is a waste of time to plan for retirement”.
A comment on the Let’s Get Rich With Pattu in Tamil Part 1 Episode 10 goes, “Retirement planning is a big joke. Nobody knows how long we are going to live, what the inflation is going to be, what are the interest rates going to be, do we require assistance during old age, and what critical diseases are going to affect us. No one knows the answer. Just save and invest wisely”.
What bothers me the most is that many think such a stance makes sense. Let us break this down:
- “Nobody knows how long we are going to live”. Retirement planning only needs a reasonable estimate, and an age of 90 is fairly good. Most of us will not see this age, and if our corpus can last up to this (while we don’t), it is a mark of good planning.
- “Nobody knows what the inflation is going to be”. Look at how your expenses have increased over five years. It will usually be 8% to 10% – most inflation is due to lifestyle changes. Using this as a reference, set something reasonable, such as the inflation before retirement – 7-8%- which is a pretty good estimate for most folks.
- “Nobody knows what are the interest rates going to be”. Fair enough, but our primary goal is to ensure our corpus grows at a pace greater than the inflation estimate above. If possible, the rate at which we increase our investments should also outpace inflation. If we do this, the corpus will be sufficient at retirement, and future interest rates are typically irrelevant.
- “Nobody knows if we require assistance during old age and what critical diseases are going to affect us”. Everybody (not in denial) would know that everybody requires assistance (because of some medical condition) in old age. And we will have to pay for this assistance as we cannot depend on our children. So, there is all the more reason to plan and determine how much we need to invest. Most importantly, the retirement plan should be reviewed once a year with fresh inputs.
“Just save and invest wisely”. For most people, this is not possible without proper planning. Without appreciating the impact of inflation (before retirement), it is impossible to appreciate how much our expenses will be at the time of retirement.
Without appreciating the impact of inflation (after retirement), it is impossible to appreciate how big a corpus is required to generate an inflation-indexed income.
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Without appreciating the importance of risk management with a variable asset allocation strategy before retirement and a bucket strategy after retirement, it is impossible to arrive at the current monthly investment required.
“Investing wisely” is impossible without a proper retirement plan. So planning is essential. Remember, the goal is to fill the glass as much as possible. An all (full glass) or nothing (empty glass) attitude is harmful. So please plan before it is too late.