Real Retirement Crisis..
The real retirement crisis is something I saw last week in Lucknow. I met an IFA whose neighbor is 115 years old. This means this means he retired about 55 years ago. The year was 1964. He retired on an ANNUAL salary of Rs. 1800 (not sure but thereabouts). Obviously he could not have built a big corpus – he had to be dependent on his kids.
Now he gets a pension of Rs. 15000 per month (7 times his annual salary at retirement). Forget his saving/investing skills. He has been protected by an indexed pension.
Now as an IFA you are estimating a clients Investment requirement…you make the following assumptions:
- Client could live till age 90 – while the client himself thinks he will live only till age 73 (average Indian life).
- Client will keep 60:40 asset allocation in debt equity till age 70 (he changed it to 80:20)
- Client will be disciplined while withdrawing from debt/equity boxes (client withdrew too much of equity)
- Client will not ‘gift’ money to relatives. He did.
- Client will spend Rs. 20L on medical expenses. He has spent Rs. 30L already.
Do you realize the risk? Even if one assumption goes wrong, the total calculation goes for a toss. A complete toss.
THAT IS THE BIGGEST risk in retirement fund management. We make many assumptions.
REMEMBER EACH AND EVERY ASSUMPTION can go wrong. Maybe some will surely go wrong, and some will not.
ck
Assumptions must normally be validated but not always possible. Experience and past data may be used to make best judgement to minimise assumptions going wrong completely. Mid-course corrections must be made during the investment journey depending on how much deviation is happening from original assumptions. Life is not that simple indeed.
Krish
No IFA in the world can create one time plan for 20-50 years. After the first plan is made, it need to be reviewed and revised every 3 years or 5 years depending on so many variables.