Retirement planning essential part of savings

The single most under preparedness I've witnessed during financial planning across individuals is for the retirement need. Most youngsters feel that it's too early to plan while the middle agers are inundated with priorities of children's education and house construction, by the time they realise the urgency, it's either too late or have to provide a higher contribution.

Also, there are cases where they tend to contemplate if they should postpone the timing altogether.

While most of us are comfortable and comprehend saving for house, children's education or marriage needs the contribution towards retirement has always remained a fraction of what is desired.

Even this is mostly restricted to the compulsory investments that tag into retirement like that of NPS (New Pension Scheme) or EPF (Employee Provident Fund) which are more of an obligatory than voluntary contributions.

The provisions henceforth have way high shortcomings than actually required for the need.

What most don't also understand is that retirement is not a destination but a journey. Imagine, someone trying to live out their savings for a comfortable life - a duration which is possibly equal to their most productive period.

When a 35-year-old person begins to start planning for retirement at the age of 60 for about 25years i.e. till age 85. So, one has to plan for a 25-year (age 60 onwards to 85) journey in 25-years of time (from age 35 to 60). Now, it seems like a simple and easy plan to execute.

Add the dynamics of inflation, market fluctuations and asset allocation, the picture suddenly turns complex. During accumulation phase, the approach to asset allocation is an aggressive one compared to the one during distribution phase.

Also, with the age and as the time to goal shrinks, the allocation towards riskier assets gradually come down. Once, the timeline for consumption begins the asset allocation should be in such-a-way that it allows to preserve the corpus while continuing to provide the required cash flow.

Many people don't assume the hurdles of not creating enough buffer for the golden years. They can't presume that inflows would almost stop while there is a constant outflow ticking out of their accounts, especially spending for healthcare.

Another misconception people have is that they just become free and retired life becomes a holiday. That's not true and just detachment from regular work wouldn't call for a holiday if one is not prepared for.

Another crucial common mistake is a conservative estimate of the costs during retirement. With the reduced family (most assume only self & spouse) in the retired phase of their life, the assumption is that the monthly or regular costs would come down drastically.

Of course, the reduced commute for work and other social activities would be reduced but that doesn't always translate to drastic lower expenses. One has to ensure that about 75-80 per cent of the pre-retirement income is generated to lead a comfortable retired life.

Another often assumed fallacy about retirement is the composition of equity. The reservations in investing in equity don't just restrict to investing for retirement but also post-retirement.

Many think that asset allocation to equity should be cut to zero in their retired portfolios but the fact is that up to 20 per cent could be retained for although the retired period so as to ensure better estate preservation.

One always wants to leave behind a legacy and a constant reduction in the corpus would reduce this possibility. Conservative-only investment approach could plough back part of the corpus that is ideally planned to pass on as an estate to the inheritance.

A bit of long-term equity not only provides for a higher return but also helps in achieving diversification.

So, for an enjoyable retirement one needs to plan parallelly with all other needs and considerable priority be assigned to this need. One can't wait to finish other needs or follow a sequential order as that would miss to unlock the power of compounding.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)