Silent Killers Of A Fulfilling Retirement

Some retirement planning decisions seem seem inconsequential and harmless. But they may go on to have adverse long term consequences that are irreconcilable. Therefore we must recognise these decisions and their implications. And that would be the focus today.

Assuming Linearity Of Expenses, Inflation And Returns Post Retirement

We do this because we follow thumb rules like the 4% rule which says that a corpus worth 25 times our current annual expenses would be enough to sustain us for 30-35 years post retirement. But such rules and withdrawal rates no longer relevant. The 4% rule has been prescribed based on research conducted in America in the 1990s. The research was based on a 50:50 asset allocation between equity and debt. It assumes a retirement age of 60. Life expectancy post retirement is assumed to be 30 years.

But, India’s average retirement age is coming increasingly closer to 55. Therefore, a corpus lasting 30 years post retirement may not always be adequate to retire completely. Asset allocations of retiree portfolios may vary from the 50:50 allocation between equity and debt assumed by the research study. Also, inflation in America has historically been a lot lower than in India.

Also, adhering to such rates implies that we withdraw a fixed percentage of our portfolios, after adjusting for inflation in during each year of retirement. But in reality, our spending needs may change from year to year. In fact, our spending in retirement may follow a phased pattern. During the first phase of our retirement (say until age 65), we may spend more from our corpus. This can usually be put down to discretionary expenses such as travel.

During the middle phase of retirement (say between age 65 and 75) we may slow down physically. Therefore we may tend to spend relatively less from our corpus during this phase. During the late phase of retirement (say age 75 onwards), long term cognitive and lifestyle issues are likely to kick in. This would lead to an increase in spending owing to healthcare expenses. We are therefore likely to withdraw more from our corpus during this phase. This means that our spending patterns throughout retirement are likely to resemble a smile shaped curve. This is borne out by the concept of the Retirement Spending Smile as shown in the graphic that follows.

All of this points towards the fact that the concept of a safe withdrawal rate is arbitrary. We would be better served in defining spending limits for each year post retirement. More on this in an earlier article Retirement Investing - II : Managing Withdrawals Post Retirement

Buying A Retirement Home Too Early

We usually tend to do this in our early to mid 40s. We then hold the home until retirement before moving into it. We usually do this to leverage our significant income during the peak years of our careers. This is especially true when there is a crash in the real estate markets. This seems like a perfectly logical financial decision. But there are a few second order implications that we usually fail to consider. Our retirement home may lie vacant for significant periods, if we cannot find tenants. Also, the costs of maintaining our retirement home may predominantly have to be borne by us. Moreover, our physical health may have significantly deteriorated by the time we move into our retirement home. This may affect the accessibility of our retirement home. This is especially true if we move into our retirement home in our 60s or later.

The best time to go through with the purchase would be 1 to 3 years before we intend to retire. By then, we would have planned effectively for a new home. We would also have a clear idea of what our physical health looks like at that point of time. We would therefore be able to choose a home that is ideally suited to our needs in terms of accessibility and convenience. Here are some of the other things to consider when buying a retirement home.

Borrowing From Our Provident Fund For Immediate Needs

Our provident fund is a crucial long term avenue for retirement. Needing to withdraw from our long term investments to meet immediate needs indicates that our cashflow management system may be ineffective. And that is the central issue that needs to be tackled.

This can be done through proper budgeting of expenses and setting up and/or augmenting our emergency fund. Our provident fund accounts should be treated as an investment avenue that is exclusively earmarked for our retirement, and withdrawing from our provident fund accounts should only be a last resort.

Running Complex Portfolios

We may do this because we wish to invest in every investment product that catches our attention. But such an approach causes portfolios to lose purpose. Also, we may develop cognitive issues in our later years post retirement. Managing complex portfolios in such situations would become harder. Therefore our retirement portfolios should ideally only consist of a few simple investment products across asset classes. More on this in my earlier articles Defensive Investing Decoded II : What It Takes, And Why It Works and Defensive Investing Decoded - III : Constructing Defensive Portfolios.

Final Thoughts

Any decision we make when planning our retirement would have some implications that are clearly apparent. Some others are harder to perceive. Making decisions based solely on the most apparent implications is the foremost source of errors in retirement planning. More efforts must be put into understanding the more subtle nuances that our retirement planning decisions have on our finances. That is the only way to ensure a fulfilling retirement for ourselves and our families.