I read an article a few years ago – 2 or 3 and that left a great impact. Let me do a copy paste of what is left in my head. It is an American article about Adviser’s perspective. I have seen Indian advisers too who are in a state of denial when I hit them with “what happens if equity returns are less than debt for 8 years” or “what if inflation outpaces equity return”. Largely they get into denial and say “such a thing cannot happen”. Here is an article for all such people…

We need to estimate future market returns and volatility to make a number of calculations, including how much we need to save, how much we can spend each year, and what an ideal asset allocation would be. We may also use this estimate of future returns and volatility to determine how much to allocate to a FLOOR PORTFOLIO. This money has to be in annuities or bonds (no not bond funds). If you need to avoid re-investment risk you need a bond ladder – and sadly India does not have a great secondary market in bonds for you to create a 20 year bond ladder. You need to take EXPENSIVE endowment plans with guarantee assumptions.  If we think future equity returns will be quite high, we’ll probably feel less need for a large floor portfolio and vice versa. However how will we know whether this is over confidence or plain stupidity?

As so many plan parameters are dependent upon the guesstimate of market returns and volatility, it is obviously the MOST CRITICAL assumption. The other 2 risks that seniors seem to be IGNORING are longevity and inflation. Most retired people deny chances of living up to 100 years of age – and I have too much evidence against this!

Sadly there isn’t a single spending rate, savings rate, asset allocation, life expectancy, spousal life expectancy, and floor allocation that are optimal. Especially across the broad range of possible returns suggested by calculators with a high return, but a cruel standard deviation. We are not even talking of sequence return risk – so here picking the optimal parameters from the average scenario may be DRAMATICALLY  incorrect if your retirement ends up significantly better or worse than the average case you predicted.

The working results are sensitive to the portfolio return and volatility assumptions. A small change in a plan’s market return assumption will make a huge (real huge) difference in what we calculate as optimal spending rates and asset allocations. The error in our estimate of future market returns gets magnified.

I have still not the increasing costs when one of them dies – and more help is to be called in. God forbid if there are re location costs to be incurred!



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