CHALLENGES IN RETIREMENT PLANNING
Some of the challenges in the retirement planning are highlighted here, the challenges vary from internal mind set issues to lack of information to parameter estimation etc.
Mindset: A typical reaction to retirement planning is “My salary is low nothing is left at the end of the month, unable to save, will start once I get raise”, this is a case of bad money management. There is always scope for saving albeit small percentage. Best way to start saving is to simply relook at the expense pattern and pull some 5-10% from expenses. There are good mechanisms in market where a direct debit will set aside an amount directly into an investment and then balance is yours to spend.
Awareness: Lack of awareness about investment products and making incorrect choices is another big challenge in the entire process of retirement planning as it simply misleads the investor from wealth creation to wealth destruction, without realising, until binding commitments are made. For example, investing in an asset which will give you lower returns than bank rate and increase your expense commitment to finance the asset. Investing in real estate like apartment for rental income is a classic example.
See how it works, you put ₹20lacs upfront and buy property of ₹1cr you start EMI on it for ₹80K and you collect rent of ₹25k. You have just increased your EMI commitment of ₹55k pm. This is called wealth destruction, the net effect is increase in cost commitment. So instead of this if you had put this ₹20lacs in MF and then made SIP of ₹80 K pm for 20 years guess the amount you could have accumulated, more than ₹8-10cr assuming a return of 12%p.a. You think that ₹1cr apartment will touch ₹10cr in 20 years, can’t say. In fact we cannot say that guaranteed returns will come from mutual fund investment also but mutual funds will offer flexibility to change the investment portfolio and also flexibility to increase/decrease contribution.
Role of Advisor: There is a well-accepted norm of insurance agent in our country but we are not used to concept of investment advisor or retirement advisor. After taking some advice from friends and relatives, individuals believe that he or she has planned for retirement, the role of expert in retirement planning is underestimated. One needs to understand that the retirement planning process requires formal education in personal finance, taxation, insurance, investment products and portfolio analysis skills. A professional is always better informed than a friend or a relative.
Duration of Retirement: We also underestimate the duration of retirement, the average life expectancy has increased from 65-70 years 20 years ago to almost 75-80 years now and 20 years down the line longevity is likely to increase. So one is looking at 25-30 years of old age without income but expenses which could be 3 times today. Here, retirement planning becomes a challenge, it’s like asking how long one will live and therefore how long do we have to plan for?
Inflation Estimate: Inability to estimate inflation, it’s not possible to predict how inflation will pan out in future for next 20 years therefore difficult to make assumption. As a thumb rule inflation of 4-6% is fair for developing country like ours. TIP is don’t under estimate inflation. Today if your cost of living is ₹25k per month, rest assured it will be 3-4 times in 20 years especially country like India where inflation hovers around 4-6%.
In addition to mindset and lack of awareness, there are estimation parameters which are unknown in the retirement planning which pose bigger challenge than behavior or awareness.
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