Financial Plan review process for retirees should not be disregarded

Having a Financial Plan, reviewing and monitoring the Financial Plan are indispensable processes in prudently managing your personal finance. You can’t deny the relevance any more in current rapid socio-economic changing scenarios. Like others, it’s not an exception for retirees. Rather it’s more important. Transitioning from accumulation phase (retirement savings) to distribution phase (retirement income) is not always so smooth (financially or emotionally). Therefore, as Certified Financial Planner in Kolkata, we follow structured financial planning processes while working with retirees and pre-retirees. A bi-monthly review/quarterly review is required where you may have to change your strategies as per the prevalent situations. It helps you to increase the possibility of positive outcome by taking required steps as per your personal or economic changes in your Financial Plan. Financial Plan review also allows you to analyze your individual investments and determine if they are worth keeping in your portfolio. review of financial plan is an ongoing process for all. But, we have categorically written the article to make a retiree understand the importance of review.

Financial Planner acts as your guide throughout your journey towards financial freedom

You may retire early and live for long. Does early retirement mean early death? Many of you may be reluctant to review your Financial Plan even after you had designed your Plan. If you fail to review, you’ll fail to achieve your aspirations.

The common complications are:

1. They don’t come for Financial Plan review at a predefined interval or in case of any doubt.
2. They don’t follow exactly what’s written in the action plan.
3. Budget is not followed.
4. They don’t maintain monthly cash flow.
5. Plummeted Interest rate.
6. Tempting sales pitches by bank relationship managers/agents/brokers etc.
7. Due to improvement of Medical Science, increases longevity.
8. Medical Inflation.
9. Still interest income is preferred by investor& consequence is rapid retirement corpus erosion.
10. Absence of Defined Benefit Pension Plan by Employer, but they have herd behavior where they’ve Defined Contribution Pension Fund (DC).
11. Income Tax Liability.
12. General Inflation.
13. Without having much skill they prefer “DIY” (do it yourself).
14. They follow general statements/illustrations of magazines, newspapers or electronic media.
15. After Financial Plan, they take second opinion from parents, relatives, colleagues.
16. They follow the rule of thumb.
17. Too much of busyness and give less priority to personal finance.
18. Hardly they can change their mindset as because of wrong practice, which becomes character.
19. Social obligations/family commitments.
20. Loss of capital due to fear/greed.
21. Become too much emotional (fear, greed).
22. Lack of asset allocation based on investment time horizon, risk profile & investment objectives.
23. Continue traditional savings schemes in the falling interest scenario (interest risk).
24. Herd behavior etc.

While you target of the formal assessment of Plan with the intention of instituting change if necessary, you find the following:

1. Budget & Cash Flow.
2. Exiting Assets which you had mapped with your financial goals during financial planning.
3. Tax efficient.
4. Offset of Inflation.
5. Insurance.
6. Succession Planning.
7. Investment vehicles.
8. Debt pre-closure Planning.
9. Portfolio Analysis (Risk & Return as per current scenario for Asset Allocation).
10. Key Financial Ratios:-
    Liquidity Ratio;
    Savings Ratio;
    Debt Ratio;
    Asset Utilization Ratio;
    Solvency Ratio.

Your qualitative and quantitative inputs may change with time. What you thought at the age of 60, you may not think the same way at the age of 65. This happens due to changing time, health condition, family structure, cash flow.  All these are qualitative inputs and some of them are bound to change.

On the other hand what you need quantitatively at the age of 60, say for family expenses you needed Rs. 7,00,000 p.a., at the age of 65 you may need more or less than Rs. 7,00,000. You’ve grown by 5 years, so with time and situation your quantitative inputs may change.  Therefore, with personal & macroeconomic factors you have to alter or correct your financial strategies by incorporating the suitable inputs in the system.

These are some common factors and as you’re a unique person you may experience unique changes in your lifetime. Some of the factors are visible while some are invisible, or you may anticipate or mayn’t anticipate of an outcome. That’s the reason you need Retirement Plan and review of Retirement Plan.

There should be an income focused investment strategy based on risk profile during retirement (distribution phase). Due to ignorance, quite a good number of retirees chase guaranteed return and book guaranteed loss (due to effect of inflation, income tax & interest rate risk).

Financial Plan reviews ensure that you’re on track

Why Financial Plan & thereafter Financial Plan review are indivisible?

One of our retired clients, Mr. Ranjan Sarkar (60) (named changed) was looking for a Financial Advisor in Kolkata. He came to us for reviewing his Retirement Plan. He visited us almost after two years for Financial Plan review after we handed over him the plan. Mr. Sarkar retired from his service 2 years back.  His wife Mrs. Shreya Sarkar (55) is homemaker and his only son Sayan (27) is working in MNC and financially independent.

The following objectives of Mr. Sarkar for Retirement Plan:

1. He has no defined benefit (DB) pension. Whether he had adequate retirement kitty to meet his expenses?
2. How & where he can put his retirement benefits & other savings & investments to generate regular income after retirement?
3. Whether purchase of additional property (real estate) for investment is wise decision for him or not? Already he had applied for the project.
4. Need International Vacations every 3 years interval.

Our take away from marathon meetings with Mr. Sarkar:

1. Now one of the challenges is how to manage money during his retirement?
2. Figuring out how to withdraw income from his investment portfolio to support him/his family until death, while still allowing for growth to supplement expenses down the road?
3. He may have retirement Income Bridge – a stream of income from his rental income & pension (DC). Provision should be made in such a way so that 1st source can offset inflation & income tax. As the 2nd source (DC/limited pension) can hardly offset as it’s not inflation-indexed. Need more analysis based on unique issues?
4. Medical expenses, as Mediclaim is not adequate, since both husband & wife have major health issues (Contingency Fund).
5. How to offset inflation (may be 6%), tax efficiency (tax slab can be 10%/20%)?
6. His risk profile indicated that “balanced” approach should be taken in taking investment risks. As SEBI Registered Investment Advisor in Kolkata, we give substantial importance to risk profiling and it’s interpretation along with other parameters while developing investment strategies.
7. His personal assets were 33% & investment assets were 67% (both financial & real assets).

Our recommendations

As Fee Only Financial Advisor in Kolkata, we provided the following guidance:

1. As he had rental income, which would cater to his monthly needs of 75% of his total monthly expenses (as per projected income & expenses). For earning of residual 25%, we asked him to park low risk investment portfolio for next 4 years due to unique situation.
2. As he needed more financial assets than physical assets, we strongly recommended him to rescind buying the new property.
3. If he could top-up his Health Insurance cover up to allowable limits by Insurer.
4. He must keep aside 10% to 15% of his Retirement Kitty for contingency.
5. For International vacations, he may keep aside the required amount systematically every month (based on his cash flow).

What Mr. Sarkar missed, as he came for Financial Plan review after 2 years?

1. As he didn’t opt for new flat, he could have saved the amount of money & kept in liquid fund without proper asset allocation. Example of “DIY” (do it yourself). He didn’t update me.
2. Not getting regular monthly rental income what he projected at the time of data gathering. That was also his blunder, as he didn’t update me.
3. He missed the opportunity while Sensex was 22,951.83 & Nifty was 6,976 (February 2016).
4. His personal assets appreciated better than investment assets as only 47% of investable surplus was managed professionally and the rest 53% was managed by himself, “DIY”.
5. Systematically he used to withdraw 56% so far for family expenses parked in liquid fund & the rest from Saving Bank A/c. Neither he has restricted to budget nor maintained cash flow while he was operating his savings bank (indiscipline).

Atrocious consequences for not following Retirement Plan & Financial Plan Review process

1. He may live in stress for rest of the life, which is not at all desired.
2. Due to deficit corpus he has to reconsider his risk profile & no other way except to keep more exposure in diversified equity funds. Which may be beyond his comfort level?
3. He missed the compound effect of interest. Since money is not free & it has a time value. Two of the most important aspects of good money management are the time-value of money and its associated compounding effects.
4. He had an ancestral property could sale at an appropriate market value at least 2 years back, and could invest prudently after payment of LTCG or could invest in 54 EC Bond. Now the Real Estate Market has come down & rarely does it have liquidity.

Today, almost all you go for a medical check-ups at regular intervals. Yes, it is highly important to remain in sound health to achieve your aspirations in life. Similarly, you shouldn’t be reluctant to undergo Financial Plan review process, specially in case of Retirement Plans. While you retire, you expect worry free life. You need financial freedom & peace of mind. If there are doubts in these steps, you can’t live a healthy life.

Let your Financial Plan work for you with periodical review. Through Financial Plan Review process, you can alter and rectify your action plans. It’s better if you look at these aspects with a sensible and realistic understanding regarding personal finance. Your Financial Plan changes with different life stages and personal situations.