In the year 1800 the average life expectancy in the USA was about 40 years. A kid born in 2014 in the US is likely to live till the age of 82 years. In fact the probability of this kid reaching the age of 100 years is very high.
Obviously retirement planning was not much of a concept even till the 1960s – the Social Security started at 60 and the life expectancy was less than 70. It is only in the 1980s or 1990s that the concept of retirement planning was being taken seriously.
Take the Indian context. Even today the concept of joint family is not completely dead. Balance sheets are not drawn up and there is not much clarity about whose money is being spent on what. Sure, if there are fights suddenly balance sheets are drawn up, but that is more the exception.
Most of the middle class in India who had a government job were secured by an indexed pension. I know of families which are still being run on the pensions – the longevity of a 89 year old father helps! The 64 year old son who does not have a pension continues to live on the parental pension. Remember Indexed pensions are so huge that a family of 2-4 people can live comfortably on a pension of say Rs. 94,000!!
That brings us to the persons who are now in their 30s to 50s who can do something about their pensions. Those who are in their 60s have already exhausted their ability to earn and accumulate. They are the people whose portfolios are full of LIC policies which are likely to get about 5% pa returns, and are likely to lose money in ULIPs. So if you are planning for the retirement of these people you should be looking at the weighted average yield on their portfolios. Assuming that they have about 70% of their assets in poor yielding assets like Life policies, ppf, etc. it is ONLY with the remaining 30% that you can improve the over all yield to combat inflation.
Tough ask, right? No. It just cannot be done. Ask them to take a walk.
They should have started earlier or increase the amount of equity in their portfolios. And this portfolio needs to be very well managed – for a high return and low capital risk. Easier said than done.
As the concept is new, we are all learning.
Also very few IFAs are capable of handling a staggered inflation adjusted steady withdrawal. Which reminds me of a story.
It was in 1962 that NASA knew how to put a man on the moon. However they actually put a man on the moon only in 1968. Why?
Simply because NASA had to perfect the art of bringing him back. Exactly how many IFAs can help you in the accumulation stage – but what they can do for you if you decide to withdraw it regularly is a tricky question.
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