her than the regular certain expenses, there are also situations where the expenses increase without much planning – like in the second case mentioned above. What’s worse is that the regular cash flows stop or reduce during retirement.
Expenses > Income
Retirement Planning Biases
Let’s get back to the 2 emotional biases we had discussed earlier - The myopia bias and the optimism bias.
- Myopia bias – Human beings tend to have a bias of short-sightedness. We like to predict and plan for things that are in the near future and tend to ignore the distant. This is very evident from the excitement generated when one has to plan a vacation 3-months away. But when it comes to planning for let’s say a vacation that is 2 years away, we often think its too far and we have enough time. In fact, if one is to plan early, the commitment in terms of investment allocation can be really low as it gives you more time to accumulate gains.
- Optimism bias – There is a common feeling amongst humans that nothing bad is going to happen to them. And even if they are to believe that problems can happen, they would hardly ever want to think or talk about it. They prefer to be optimistic about everything. Unfortunately, as explained above, when trouble comes it increases the outflow and decreases the inflow. Hence, this plays a very big part in improper retirement planning.
Urgent vs Important
The myopia bias leads us to mix up what is urgent and what is important in investment planning. Retirement planning in India has suffered more so because for Indians, saving for kid’s education and future has always been the priority. As kids start to grow up, Indian parents start to worry about their education fees and payments for their various extra-curricular classes. Only because this is urgent it starts appearing as important, and retirement planning which is genuinely important takes a backseat.
Also, another priority for Indians has been to save for their children’s weddings. The day a daughter is born, the parents are expected to start saving for not only a big wedding, but also invest in gold to give to the daughter when she gets married. On the contrary, no one ever tells a young man who has just started in a salaried job to start saving for his retirement.
Importance of Retirement Planning
One must understand that retirement planning is really important. If one plans to take full retirement at the age of 60 and expects to live up to the age of 80, we are talking of 20 years of no cash flows from an active job with expenses continuing. What’s more is that the expenses are most likely going to increase as the medical expenses go up. One also has to take into account the fact that even though the expected age maybe 80, an individual may quite possibly live well past that age. This only means a prolonged period of expenses with no remuneration from a work-life.
Points to Keep in Mind During Retirement Planning
We have put together some points that might help an individual focus towards a proper retirement planning process.
- Retirement is inevitable – One must understand that at some point in time you will not be able work anymore. So, one needs to make sure that they planned their investments in a method where the cash flows continue.
- Start Early – This is the key to a comfortable retirement. The earlier one comes to term with the fact that retirement will happen the earlier they can start to save for it. Early planning gives one more time to accumulate and earn on savings. It also allows a person to take higher risks for more gains early on in life.
- Diversification – Though early on in life you may have a preferred asset class such as equities, as one ages it is very important to diversify.
- Inflation – One must always keep in mind that at retirement, which may be 20, 30 or 40 years away, the price of things is going to be many multiples of what it is today. It is always better to use a higher rate of inflation to estimate expenses.
In conclusion, we can say that with retirement, “one must plan for the worst and hope for the best” and surely no