Retirement, a beginning of an uncertain journey

How many of us are sure with the investment goals? And if we do have clear goals, how many of us are aware of what phase of their investment cycle they are in?

According to Joshua Brown, there're primarily three phases of an investor's life.

Accumulation, Maintenance and Distribution - all or everyone has to fall in one of these buckets. Like the words, the meaning is pretty simple and straight.

Accumulation is a phase when the investor would be steadily contributing the life earnings to savings and investing to the goals.

At this phase, ideally any excess income or surplus in savings needs to be diverted towards fulfilling the goal and hence should be invested accordingly. This is probably the time to cheer the dips in the equity markets and have the cushion of time on the investor's side.

The next phase is where there's already a substantial money or wealth is made with respect to the life's goals. Now either the goal timelines are shrunk or on the verge of reaching the timelines.

This is a phase where the decision making is tough and tricky as one wouldn't have the luxury of time for a recovery if an investment decision goes wrong.

Add to the pressure of servicing the need is high and leads to an anxiety of decision making. This is probably at the highest as someone is migrating to the next phase.

The distribution phase of life is portrayed or envisaged to be full of pleasantness and less of anxiety. This is the phase where mostly the income earning capability is either reduced or completely seized.

It's a mix of the earlier phase of retaining the existing corpus as much as possible while simultaneously consuming the corpus in pieces. Of course, the outcome is directly proportional to the successful implementation of earlier two phases of the investor's life until and unless there's a windfall, a rarity in most cases.

This phase is very complex and should have a greater understanding of multiple factors like life expectancy, inflation and the productivity of the corpus.

Living too long is a huge concern and what if you were to last beyond your planned retirement fund. How should one approach the annuity i.e. frugal fixed income for a defined period, high disposable but for limited time or incremental inflows over life time.

These are very tricky questions to be answered which would then decide the amount of corpus to be build. And if one were to plan a quantum that addresses joint life expectancy then the disparity in the mortality of gender needs to be considered also.

So, life expectancy plays an important factor and if this involves creating or leaving behind an estate, the complexity only surges further.

The other sub-plot to be considered is the medical advancement that could add to the life but also the costs of which are not easily be discounted for.

If compounding is an eighth wonder then so is inflation, an inverse which aggravates our pain when not factored for properly. This is an inherent risk that could erode our corpus and derail our plans.

It's the value of the money that corrodes over time and if not substantiated would deeply hurt the entire planning. When we make wrong assumptions, it could lead to either projecting the required amounts at a very high levels or on the other extreme too conservative that could fall short of the need.

As a growing economy we've always had a relatively higher inflation with that of the developed world. Though, the future may not be an exact repeat of the past years, it certainly throws us an indication of how things would turn up.

The price of our staples, daily use-goods and services would eventually inch up and it has to be factored in accordingly. This would only worsen if we end up beyond the average life expectancy that was planned for.

Most times, people see retirement planning as a destination but it's just the beginning of a very long and uncertain journey. Linking to the trickiest part of the three phases of our lives, the post-retirement corpus management is very critical.

When advisors and planners come out with spreadsheets and pie-charts suggesting how the corpus is achieved, many individuals assume that the entire corpus is readily available in liquid.

Asset allocation becomes supreme at this stage. With no or limited inflows coming in and unexpected timelines for servicing i.e. annuity consumption, the need for a prudent approach is higher at this juncture.

While the other two factors concern during the planning, we end up facing them throughout during this phase. Improper risk management would turn even a higher corpus turn insufficient and disturbs the peace of mind, which many crave at this time of life.

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