Sunday, October 13, 2013

What can make or break your retirement planning---YOU

 With present high inflation and low business environment, everybody is talking or thinking about their likely retirement picture.

Retirement planning, supposedly, is a road map that helps you understand, visualize and work towards a financially independent post retirement life. Theoretically speaking that is.

A plan template assumes certain factors which are common. However, just like fingerprints, retirement planning roadmap is different for every person. Past experience and current environment can certainly be of some help in devising a strategy which is based on certain guiding principles and lots of commonsense.

Laying down the guidelines—rather than be of help-- may themselves impede the retirement planning process. One of the biggest roadblocks to setting up a workable retirement planning strategy is—YOU.

For instance:-
  • You may have assumed average inflation to be 8%, while actual inflation can be and is actually higher than the assumed rate.
  • Working with an average rate of return on equity component.
  • Visualizing a non-volatile & rather linear debt fund returns.
  • Assuming that the PPF and LTCG (Equity) will be tax free forever.
  • Ignoring tax on annuity/pension.
And the list goes on and on and on………

None of that is said above will affect your plan as much as you will.

Yes. You and me---we.

It is you and me that can and will make or break the retirement plan-- 
  •  Pre-eminence of real estate in the total portfolio 

Indians have been traditionally inclined towards gold and real estate as fail safe investments. You just cannot go wrong with them in your portfolio. 
As if one house used for self-occupation is not enough, people buy a 2nd.  or even a 3rd. house for investment. Most people do not realize that many so-called one-time purchases come with regular expenses tagged!  One common example is maintenance charges and other expenses associated with a bigger house.

Nothing wrong with this, everyone wants to enjoy the pleasure of life as they earn more.  However (there is always a however!), any increase in annual expenses (other than that caused by inflation), must be immediately taken into in the retirement plan-something that is given a pass by.

Of course, an increase in annual expenses obviously means we need to invest more each month for building a bigger retirement corpus to account for our present lifestyle.

  •  Zero tolerance to compromising present lifestyle 

One of the basic tenets of retirement planning is that you will maintain your present lifestyle into retirement. Calculations for retirement corpus are based on current expenditures and hence, present lifestyle. The idea is to arrive at a retirement corpus that will at least live till you do.

A good figure to compute in spread sheet. What most people fail to realize is that the key requirements of a retirement corpus intended for a future lifestyle, imposes constraints on the individuals present lifestyle.

It is quite common for us to regularly upgrade our car, televisions, mobiles etc. in tune with changes with our incomes. Nothing wrong in that except that it is quite likely that our incremental annual expenses increase at a rate much greater than assumed inflation.  Unfortunately, these additional expenses would increase with inflation too!

It would be prudent to recognize that most lifestyle changes are difficult to reverse and hence must be factored in while planning for retirement. In absence whereof rest assured that your life style in your twilight years will not be as comfortable as your present one.

Hence, beware of yourself. The choices that you make today can impact your future in more ways than you can possibly imagine.

  • Pre-eminence of real estate in the total portfolio; and
  • Zero tolerance to present lifestyle

are not the only factors that influence your retirement plan.

Watch this space for more as picture abhi baki hai.