The most of the pensioners believe in employment benefits which sound good but in practice, it’s not defined benefit pension plan, it’ll be an illusion. I was approached by a new retiree, Mr. Arjun Chakraborty (name changed), for his post retirement planning, who retired on June 2016. Mr. Chakraborty is now 60 and his wife is 53. Their two children, aged 30 and 27, are working and both are unmarried. He was working as an Auditor in a Govt. of India organization. Considering the demography, he expects to live for 20 more years i.e. till 80 years. His wife is a homemaker. Mr. Chakraborty visited me with aspirations which everyone wants to fulfill. He wants to enjoy worry free lavish life during retirement, make marriage provision for both the children and replace his old car by new one.
Mr. Chakraborty wants to enjoy his life now, as he believes that he couldn’t enjoy it due to too many constraints and commitments.
Due to his innocence he didn’t infer that he needs retirement plan due to noticeable amount of pension. Goalposts for a person are often changing almost in his/her lifetime. It’s good and while we come across these, we place ourselves according to needs. But while a person retires, s/he hardly anticipates how and when the positions of the goalposts keep on changing. Being an Auditor, Mr. Chakraborty anticipated the invisibles and approached me.
I considered the following subjective personal issues:
- Health issues both physical & psychological
- Outliving of retirement corpus
- Isolation & loneliness
- Sense of insecurity
- Illiteracy due to aging problems
- Increase of longevity due to medical science
- Self esteem
- Family structure & other close relatives
- Estate planning
I considered the following major macroeconomic factors:
- Interest rate risk
His current financial status:
His monthly pension is Rs. 33,500 per month.
The current value of his investment assets are Rs. 86, 00,000.
He has his own residential flat in Kolkata (Personal Asset).
He has employer’s sponsored medical benefits.
There’s no liability as on date.
His aspirations/goals are:
- His current expenses are Rs. 47,000 per month. I have to consider both inflation income taxes & he needs to offset both inflation & tax. His expenses will increase year on year.
- Chakraborty has to keep aside Rs. 15, 00,000 as marriage provisions for both his children 3 years from now.
- He wants to leave a legacy amounting of Rs. 25, 00,000 for both the children after his & his wife’s death.
- He wants to keep aside Rs. 5, 00,000 for personal financial dilemma.
- Purchasing cost of new car is around Rs. 13, 00,000.
From the above inputs, a retiree hardly understands his/her future cash flows (inflow & outflow both i.e. future expenses due to income tax and inflation. On the other hand, he has some aspirations/goals of life. The primary aim is how can he allocate his investment assets towards those goals?
Apparently financial assets, post retirement pension and interest income are impressive. Because of his unique situation, a financial planner has to consider both the qualitative and quantitative inputs like aspirations, longevity, health, family structure, cash flow and net worth etc. Better to avoid/minimize assumptions. A Financial Advisor espies both the visible and invisible.
His pension is not indexed to inflation, i.e. fixed pension. Since his retirement he has been getting monthly pension of Rs. 33,500 and monthly expenses are Rs. 47,000. But with time, his pension income doesn’t keep pace with his expenses. A hallucinatory illustration is given for your understanding. I have assumed 8% inflation.
See why Pension Income is not enough
|Age||Monthly Pension Income (Rs).||Monthly Expenses (Rs).||Monthly Deficit (Rs).|
His income is deficit y-o-y. I developed the post retirement financial plan & finalized if Mr. Chakraborty wants to maintain the same swanky life style & as per my computation he needs a retirement nest egg of Rs. 1.17 Crores. By cogitating the plan he has discerned about his innocence. It’s his numerical illiteracy/unawareness that he failed to realize the real life situation! In reality he has numerical literacy but in case of personal finance the numerical calculations are disparate. Personal finance isn’t taught adequately in schools & colleges.
Over the past centuries, the life expectancy of an Indian has increased remarkably; we all welcome the effects of advancement of medical science. But simultaneously a financial plan is required to combat financial hurdles like outliving of retirement corpus. Conventional investment like POMIS, Interest income from Bank, self funding pension schemes are no more adequate strategies.
Taking inflation, income tax & interest rate risk in to account a retiree hardly survives on interest.
If someone ignores inflation revisits the numbers/my above illustration. Always consider the real rate of return.
Without any clarity about projected cash flow, i.e. income and expense, hardly a retiree creates retirement nest egg. It’s an illusion if someone thinks whatever pension and other interest income s/he gets is sufficient for his/her sunset years.
During the third visit, Mr. Chakraborty was very much obsessed about a big car due to obtuseness. He thought that he can buy the SUV model car comfortably. It’s his innocence. He had an employer sponsored pension & additional investment assets of Rs. 86 Lakhs. While I computed in details there was a huge gap between what he has & what his requirements are.
He had no budget, thus, there was a dilemma. As per mental calculations, he projected his monthly expenses. But those are not at par with the real projected expenses. Why most of the population come across the identical situation? Have you ever thought that what are the resources you can access during your retirement? Secondly, how much do you need? Lastly, how long you can sustain? Although all the three inputs are unpredictable; but through periodical reviews you can make them almost certain.
Still there’re illusions about money. Money is not everything, but can anyone ignore it? There’s as such no thumb rule. First you have to develop a financial plan. Then make your investment strategies based on your risk profile, investment objectives, investment time horizon and availability of surplus fund. Put your strategic plan into action. Lastly, review the plan periodically including your investment strategies.
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