Only Pension or Fixed-Income Plans can’t meet retirement expenses
Most pensioners believe in employment benefits which sounds good. But, in practice, it’s not defined benefit pension plan. If not understood, it’ll be an illusion. Pension income or Fixed Income Plans (passive) is not enough for you after you retire from work-life.
Practical example showing why only pension income is insufficient after retirement
We were approached by a retiree in August, 2016, Mr. Arjun Chakraborty (name changed), for his post retirement planning. He retired in June, 2016. Mr. Chakraborty is now 60 and his wife is 53. Their two children, aged 30 and 27, are working. Both are unmarried. He was working as an Auditor in a Govt. of India organization. Considering the demography, he expects to live for 20 more years i.e. till 80 years. His wife is a homemaker. Mr. Chakraborty visited us with aspirations which everyone wants to fulfill. He wants to enjoy worry free lavish life during retirement. He wants to meet his family expenses, make marriage provision for both the children and replace his old car by a new one.
Mr. Chakraborty wants to enjoy his life now, as he believes that he couldn’t enjoy it due to too many constraints and commitments during work-life.
Due to his innocence he didn’t infer that he needs Retirement Plan. He thought he has noticeable amount of pension and that should allow him to lead a comfortable life. Goalposts for a person are often changing in his/her lifetime. It’s a good thing and while we come across these situations, we place ourselves according to needs. But while a person retires, s/he hardly anticipates how and when the positions of the goalposts keep on changing. Being an Auditor, Mr. Chakraborty anticipated the invisibles and approached us to plan for his personal finance.
We considered the following subjective and personal issues during retirement planning
- Health issues both physical & psychological
- Outliving of retirement corpus
- Isolation & loneliness
- Sense of insecurity
- Illiteracy due to aging problems
- Increase of longevity due to medical science
- Self esteem
- Family structure & other close relatives
- Estate planning
Following major macroeconomic factors are considered
- Interest rate risk
- Taxes
- Inflation
- GDP
- Market Outlook
His current financial status
His monthly pension is Rs. 33,500 per month.
The current value of his investment assets are Rs. 86,00,000.
He has his own residential flat in Kolkata (Personal Asset).
He has employer’s sponsored medical benefits.
There’s no liability as on date.
His aspirations/goals are:
- His current expenses are Rs. 47,000 per month. We have to consider both inflation income taxes & he needs to offset both inflation & tax. His expenses will increase year on year.
- Mr. Chakraborty has to keep aside Rs. 15,00,000 as marriage provisions for both his children 3 years from now.
- He wants to leave a legacy amounting of Rs. 25,00,000 for both the children after his & his wife’s death.
- He wants to keep aside Rs. 5,00,000 for personal financial dilemma. This amounts vary as per family scenarios.
- Cost of new car is around Rs. 13,00,000.
Important outputs
From the above inputs, a retiree hardly can understand his/her future cash flows (inflow & outflow both) Future expenses due to inflation would keep on increasing year after year. On the other hand, he has some aspirations/goals of life. The primary aim is to allocate his investment assets towards those goals.
As Certified Financial Planner in Kolkata, we address clients’ issues and lay down the detailed action plans so as to achieve the targets. During financial planning, we give appropriate weight to clients’ personal aspects along with the other parameters while hand-holding them in their journey towards financial well-being.
Financial Plan helps you to reduce your assumptions after retirement
Apparently financial assets, post retirement pension and interest incomes are impressive. Because of his unique situation, as Financial Advisor in Kolkata, we considered both the qualitative and quantitative inputs like aspirations, own expectations, others’ expectations from him, longevity, health, family structure, cash flow and net worth etc. Better to avoid/minimize assumptions. A Financial Advisor espies both the visible and invisible aspects. Financial planning is not about numbers only.
His pension is not indexed to inflation, i.e. pension amount is fixed. Since his retirement, he has been getting monthly pension of Rs. 33,500 and monthly expenses are Rs. 47,000. But with time, his pension income doesn’t keep increasing. On the contrary, his expenses will keep on increasing every year. A hallucinatory illustration is given for your understanding. I have assumed 8% inflation (general & medical).
Someone might apparently feel that I have enough assets and pension income is there to run my family. What’s the point in hiring a Financial Planner to get my Retirement Plan done. But, the reality is different. The following eye-opening illustration may change your thought-process.
See why Pension Income is not enough
| Age | Monthly Pension Income (Rs). | Monthly Expenses (Rs). | Monthly Deficit (Rs). |
| 60 | 33,500 | 47,000 | -13,500 |
| 65 | 33,500 | 64,736 | -31,236 |
| 70 | 33,500 | 95,119 | -61,619 |
| 75 | 33,500 | 139,761 | -106,261 |
| 80 | 33,500 | 205,354 | -171,854 |
His income is “deficit y-o-y”. We developed the post retirement Financial Plan & finalized if Mr. Chakraborty wants to maintain the same swanky life style. As per our computation, he needs a retirement nest egg of Rs. 1.17 Crores. By cogitating the plan, he has discerned about his innocence. It’s his numerical illiteracy/unawareness that he failed to realize the real life situation!
In reality he has numerical literacy but in case of personal finance, the numerical calculations are disparate. Personal finance isn’t taught adequately in schools & colleges. As a result personal financial awareness is comparatively lower. As Personal Finance Professionals, we intend to educate our clients about their personal financial aspects during the journey towards financial well-being.
One may not survive by utilizing only pension income after retirement
Over the past centuries, the life expectancy of an Indian has increased remarkably. We all welcome the effects of advancement of medical science. But, simultaneously, as Retirement Planner in Kolkata, we strongly believe that a Financial Plan is required to combat financial hurdles like outliving of retirement corpus. Conventional investment like POMIS, Interest income from Bank, self funding pension schemes are no more adequate strategies.
Taking inflation, income tax & interest rate risk in to account a retiree can hardly survive on interest income and/or pension income only
If someone ignores inflation, please revisit the numbers (our above illustration). We need to always consider the real rate of return.
Without any clarity about projected cash flow, i.e. income and expense, a retiree fails to create adequate retirement nest egg. It’s an illusion if someone thinks whatever pension and other interest income s/he gets is sufficient for his/her sunset years.
During the third visit, Mr. Chakraborty was very much obsessed about a big car due to obtuseness. He thought that he can buy a SUV model car comfortably. It’s his innocence. He had an employer sponsored pension & additional investment assets of Rs. 86 Lakhs. While I computed in details, there was a huge gap between what he has & what his requirements are.
Mental calculations are disastrous
He had no budget, thus, there was a dilemma. As per mental calculations, he projected his monthly expenses. But those are not at par with the real projected expenses. Why most of the population come across the identical situation? Have you ever thought that what are the resources you can access during your retirement? Secondly, how much do you need? Lastly, how long can you sustain? Although all the three inputs are unpredictable; but through periodical Financial Plan review you can make them almost certain.
Still, there’re illusions about money. Money is not everything, but can anyone ignore it? There are no thumb rules as such. First, you have to develop a Financial Plan. As Investment Advisor in Kolkata, we prepare investment strategies based on your risk profile, investment objectives, investment time horizon, personal & macroeconomic factors and availability of surplus fund. Putting your strategic plan into action is the key. Lastly, reviewing the plan periodically including your investment strategies is a must to stay on track.
