Excuses For A Small Corpus That Lead To Big Problems In Retirement

When planning for retirement, we may make certain unfounded assumptions. These may seem logical in theory. But in practice they are often falsified. Planning our retirement based on such assumptions can irreversibly derail our chances at a comfortable retirement. Therefore today I am going to look at each of these assumptions in detail. I will delve into the reasons why we make them. I will also show why each of them are poorly founded.

My Expenses Will Drastically Reduce Post Retirement

It is absolutely true that our expenses will likely reduce post retirement. EMIs would ideally stop. Monetary support to parents and children too are unlikely to be required. This would reduce spending post retirement. But this does not mean we can assume a drastic cut in spending post retirement. Core living expenses would definitely increase due to inflation. This is true even for those who follow a frugal lifestyle. Medical expenses are likely to drastically increase. The increase would be steeper during the later years in retirement. Those of us bitten by the travel bug may spend more money on those aspirations.

Our post retirement spending levels would therefore remain about the same as they were before retirement. Assuming a slight decrease in spending may make sense. But assuming that there will be a drastic cut in spending is dangerous. It would see us plan for a smaller corpus than required. It leaves us vulnerable to the risk of of outliving our money. This is the most dangerous risk we would be exposed to post retirement.

I Will Move To My Hometown Where My Cost Of Living Is Lower

Those who hail from smaller towns and cities but work in larger cities make this assumption. The premise here is that the cost of living post retirement would be lower. This fundamentally implies that a smaller retirement corpus would be required. Making this statement when we have a couple of years left until retirement definitely makes sense. We would have clear visibility with regard to our life situation and options post retirement.

Arriving at a reliable estimate of living costs in our hometown would also be easier. But most people who make such statements are usually in their 30s and 40s. At that point they would still have 15-20 years left until retirement. So they would have no clarity on what their life situations or living costs would be post retirement. Planning retirement based on this premise is therefore likely to result in unrealistic estimates being used for the calculations. The target corpus arrived at on the back of such estimates is highly likely to be inadequate.

I Will Spend Lavishly Now, But Frugally Post Retirement

The most ill informed statement of the three discussed so far. Those who make such statements likely do not understand what frugality is or what it takes to be frugal. Being frugal is often confused with being miserly. But there is a clear difference between the two. A miser would not spend even when they need to. Someone who is frugal would spend, but do so mindfully. This means that they spend after thinking through the implications of each spend.

They would therefore happily spend on things and experiences that genuinely add value to their lives. So being frugal is not indicative of spending habits. Being frugal is a way of life. It is something that must come from within the individual. The ability to be frugal is therefore something that we either have always had or will never have.

Those who have got used to spending lavishly would almost never make the shift to being frugal. And even if they do, they would not be comfortable with the shift. It is therefore dangerous to assume that someone who spends lavishly now will suddenly turn frugal post retirement. It is even more dangerous to plan a retirement corpus around this premise.

Parting Thoughts

There is a common thread that connects all the assumptions discussed above. They are not just unfounded retirement planning assumptions. They are very poor excuses to plan for a smaller corpus required. They also come across as insipid attempts to rationalise our likely inability to save enough for retirement. There are a few hard truths about retirement that we all must accept.

Retirement cannot be deferred beyond a point. Funding retirement through external sources such as loans is neither feasible nor practical. India has no government guaranteed system like Social Security to provide for retirement. We also cannot blindly expect our children to take care of us during our retirement in today’s times. Each of us is therefore responsible for our own retirements. The least we can do is to not make a half hearted attempt at planning for retirement. We only have one shot at it after all. We therefore owe it to ourselves to not come up with such excuses when planning for retirement.