Retirement planning requires a clear-eyed analysis of future needs and income. Don't fool yourself by believing in these wrong assumptions.
Retirement planning is difficult because of the numerous competing financial obligations we have. Individuals need to understand that it must be prioritised.
Further, they must also be aware that their retirement plan does not end up being designed by assumptions they never questioned.
Here are four pointers that financial advisers can discuss with their clients.
1. Retirement is NOT one long-life phase
Robert C. Atchley, professor emeritus at Miami University, Ohio, developed six descriptive phases of retirement that represent a transitional process individuals go through when they permanently exit the workforce. While they do not apply to everyone, they do convey the message that to view retirement as one long-life phase is rather naive.
It could be a very long stage, depending on the age you actually retire and your life span. But it is a multi-phase journey depending on your health, the health of your spouse, death in the family, the state of your finances, and so on and so forth.
Tied in to this subject is the notion that spending will be the same throughout retirement. Not so. Initially, a lot of spending may take place in travel. As time goes on, spending tends to concentrate more on health issues.
2. Do NOT exit equity just because you retire
Individuals are under the assumption that one needs to completely exit any equity instrument once they retire. The issue that we must all come to terms with is that inflation never retires. So inflation will continue to do what it does best -- erode the value of your savings. Hence some equity exposure will always be necessary to provide growth.
Of course, this decision should be taken after looking across the board at all the sources of income (pension, dividends, interest, rent income, annuities), all the assets and the overall allocation.
3. Retirement is NOT a destination
Life expectancy for the average Indian male is around 67 years and almost 70 for females. That is just the average. If you come from a fairly affluent community with access to good medical facilities, are in reasonably good health, eat healthy, and not suffering from chronic or acute diseases, you could live well into your 80s. That means, if you choose to retire at the age of 60, your retirement period could well last for 20 years.
Retirement is not a vacation. You cannot be on vacation for 20 years. Neither is it a destination or a stopping point. It is just a completely different way of life than the 9 to 5 routine. A transition is a more apt way to describe it, one that requires planning and adjustment.
4. You do NOT need 80 per cent of pre-retirement income to live on
John Rekenthaler, vice president of research and a member of Morningstar's investment research department, wrote about the 80 per cent savings myth. According to him, the financial services industry misleads the everyday investor by selling the notion that an 80 per cent replacement rate of pre-retirement income is required for a successful retirement. He goes on to explain his stance with examples.
The point he makes is that once you retire, you pay less by way of tax, you have no loans to service (hopefully), no longer have to worry about keeping money aside for your child's education, and you are no longer saving huge amounts for retirement. So basically, this 80 per cent rule does not fit everyone.
What you have to figure out is the lifestyle you plan to lead. Someone might just want a car, you might want a Mercedes Benz. You might still want to purchase branded clothes and eat in swank restaurants. In that case, ensure your savings plan accommodates for such a lifestyle. Take some time to map out what your expenses may be in retirement, and to make sure you're accumulating enough to support them.
Illustration: Uttam Ghosh/Rediff.com