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  • Writer's pictureAkshay Nayak

The Advisor's Role In Retirement Planning

In the past I have always spoken about retirement planning from the point of view of the individual. And though I have often mentioned that it is advisable to seek professional help with regard to retirement planning I have never spoken about the role of a professional advisor in the exercise of retirement planning. At first glance, it would seem like the advisor's role in retirement planning mainly centres around creating and managing a retirement corpus. But, while creating and managing a retirement corpus is definitely an essential aspect of retirement planning there are a number of other aspects where the advisor would have to play an equally important role. So today, I will try to show that an advisor's role in the exercise of retirement planning is not simply restricted to the creation and management of a retirement corpus, and that an advisor actually has a much more complex and nuanced role to play in the entire process.


Before initiating the process of actually planning for retirement, the advisor must first look to see whether the client already has a specific retirement plan which they have in mind. If the client does have a plan, then the plan must first be assessed for it's feasibility and practicality. For instance, let us say that a couple in their 30s with a monthly rental income of Rs 3 lakh and monthly expenses of Rs 2 lakh wish to retire immediately. This is because they believe that their rental income is higher than their current monthly expenses. This would allow them to comfortably meet their expenses and continue to generate monthly savings of Rs 1 lakh in retirement. But this plan is flawed on two major fronts. Firstly, the couple is not accounting for the effects of inflation in the future. Inflation would certainly see this couple spend more than Rs 2 lakh a month in the future. The real worth of their current rental income and monthly savings would drastically reduce in the future thanks to inflation. This would put the couple's finances under severe stress. Secondly the couple has no contingency plan for a situation where there is a sustained period during which their rental property lies vacant, thus leading to a stoppage in the inflow of their rental income. In such a case, the advisor must make the couple aware of these facts and honestly inform them that they are not ready to retire just yet. The advisor must then suggest strategies that can be employed to allow them to retire early. A few tips are shared in the graphic that follows.

Once a broad retirement plan is in place, the advisor must also work with clients to establish a set of contingency plans to serve as a safety net for the eventuality that the primary plan goes wrong. And these contingency plans must be put in place in light of the risks associated with the primary plan. For instance, let us say that there is an entrepreneur who loves their job and wishes to carry on working until they can physically continue to do so. In such a case, the need for a retirement plan is seemingly minimised. But even so, this plan comes with its own set of risks. What if the entrepreneur suddenly loses their zeal for the business and develops a desire to try something else? What if the entrepreneur develops a long term lifestyle condition which seriously affects their health and does not allow them to work to their full potential? What if the business suffers severe losses during the entrepreneur's later years around the age of 55 or 60, leading to a drastic drop or complete stoppage in income? These are situations that cannot be responded to on the spot and therefore require prior foresight, analysis and preparation. The advisor must therefore identify these risks and bring them to the entrepreneur's attention so that both parties may collaborate and put a set of contingency plans in place to guard against these possibilities.


In the case of clients who are salaried individuals, advisors have a few additional responsibilities. Firstly they must educate clients with regard to the features and nuances of the defined retirement contribution scheme offered by their employers. Some employers offer the Employee Provident Fund (EPF), while others offer the National Pension System (NPS). Both these schemes have a unique set of features and nuances as shown in the graphic that follows.

As is clear from the graphic above, the EPF provides relatively more stable returns and better access to the maturity amount in terms of flexibility and tax efficiency. But contributions to an EPF account are mandatory, and employees lack the ability to choose how their contributions are spread across various asset classes. The NPS on the other hand allows greater flexibility with regard to the asset mix of contributions. But this is offset by the heightened variability of NPS returns. Also, the maturity amount from an NPS account is subjected to reduced flexibility as compared to EPF since 40% of the maturity amount is locked into an annuity that pays a fixed and taxable interest. Advisors must explain the nuances of the relevant contribution scheme the client has subscribed to, and help clients understand how they can structure their contributions to derive the optimal amount of benefits from them.


Apart from the size of the retirement portfolio, advisors also need to help clients identify their various sources of income in retirement. It is also important to consider the tax implications applicable to each source of a client’s retirement income. The central objective when assessing retirement income sources must always be to limit the amount of taxable income the client recieves over the course of a particular year. This would ensure optimal tax efficiency for the client. Using the bucket strategy would allow clients to compartmentalise their retirement corpus between a mix of assets with varied degrees of tax efficiency and achieve this objective reasonably well. Deciding on an ideal portfolio withdrawal rate every year is another area where the advisor would play a key role. Relying on outdated thumb rules such as the 4% rule or government security yield + 1.5% would almost always lead to less than satisfactory results. Withdrawal rates must always be assessed in light of the client’s sources of income, financial needs, inflation and portfolio returns for a particular year. Therefore the withdrawal rate may need to change from year to year rather than withdrawing at a fixed rate every year. Therefore this is a decision that must be made on the back of the expertise and judgement of a professional advisor.


Clearly, the role of an advisor in the exercise of retirement planning extends way beyond just the bare minimum of creating and managing a retirement corpus. And advisors would have a role to play during every phase of the retirement planning process right from the early years during which the retirement corpus is accumulated to the point of retirement and beyond, when the accumulated corpus needs to be managed. The period during which the retirement corpus is accumulated would test the advisor's technical acumen and knowledge of various asset classes and investment products. The period after the client’s retirement brings the advisor's analytical skills and professional judgement into greater focus. And each of these phases presents the advisor with its own set of challenges. Therefore, viewing the advisor's role in retirement planning in a restricted sense and tying their utility to their ability to manage a nest egg would not do the advisor justice. This is because retirement planning is an exercise that demands a variety of skill sets from the advisor and tests every skill set to its absolute limit.

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