Your retirement plan must not end up being designed by assumptions you never questioned.
1) Retirement does NOT mean that one must exit equity.
Individuals are under the assumption that one needs to completely exit any equity instrument once they retire. This is wrong because the retirement years may run into decades.
Statistics released by India's Union Ministry of Health and Family Welfare in 2014 showed that life expectancy in India has gone up by five years, from 62.3 years for males and 63.9 years for females in 2001-2005 to 67.3 years and 69.6 years respectively in 2011-2015. (Source: Times of India)
Do note, these are just averages. There is a significant life expectancy gap between the affluent and deprived communities. If you are in reasonably good health, have access to good medical facilities and healthy nutritious food, and not suffering from chronic or acute diseases, you could live well into your eighth decade, way higher than the average. According to certain studies, by 2050, the number of Indians above the age of 65 will cross 200 million from about 80 million currently, while the number of Indians above 80 years of age will be at 43 million, second only to China.
Err on the side of caution. Plan for chances of survival for at least a decade or so post retirement. And if that is the case, then one has to account for inflation over this time. 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.
The exact amount of equity exposure will depend on the various sources of income (pension, dividends, interest, rent income, annuities), all the assets and the overall allocation.
2) Retirement is NOT a destination. It is NOT one long life phase.
In the above point, we emphasized the fact that your retirement period could be at least two decades – if you retire at the age of 60 and live till 80.
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.
Dan Kemp, head of investment consulting and portfolio management, EMEA, Morningstar, explains that retirement these days is becoming a much looser definition. Seldom do people just stop work and start drawing a pension. We have to remember that when we are thinking about a post-retirement pot, it really came from a pre-retirement pot. So one has to really think about planning through retirement, not to retirement and then starting again.
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 naïve.
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.
3) Retirement planning is NOT about generalizations.
We made it clear that you cannot generalize about your life expectancy. Another generalization is that you will need 80% of your 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% savings myth. According to him, the financial services industry misleads the everyday investor by selling the notion that an 80% 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, no longer have to worry about keeping money aside for your child’s education, you are no longer saving huge amounts for retirement, and you no longer spend money travelling to work. So basically, this 80% rule does not fit everyone.
What you have to figure out is the lifestyle you plan to lead. One individual might just want a car, you might want a Mercedes Benz. Another might be happy with clothes off the rack, you might not want to let go of your branded clothes. Yet another might be content with home cooked food, but you want to regularly check out the latest 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.
Retirement planning requires a clear-eyed analysis of future needs and income. Don't fool yourself by making the wrong (and generalized) assumptions.