When you are not ready for your retirement …

Last week I wrote an article on “Are you ready for your retirement?” based on a survey which says 74% are financially prepared for their retirement. I raised my doubts on that survey & showed that there is an illusion. There is huge gap between our perception regarding goals & actual goals – this gives us confidence that we will achieve goals but when we reach closer to goals…….

Why people are not able to make a proper retirement corpus?

Normally there are 4 main reasons:

• People don’t save enough: this happens mainly due to some expectations from family members or under estimating their retirement goals. Most of the government employees have an illusion that there pension will be sufficient to take care of their goals so they give other goals more priority then retirement.
• Don’t have enough money to save: People think this happens because they are earning less but in most of the cases it is also that they are spending more than they should or excessive debt.
• Market Risk: It’s very much possible that someone has burnt his hands in last market crash. So he is afraid of investing and frittering away his savings.
• Too conservative portfolio: Most Indians understand risk in wrong senses & keep most of their portfolio in debt (in some cases 100%) throughout their accumulation phase.

What corrective measures people can take in case of retirement shortfall?

It actually depends on when you have identified the problem. Most of the people realize it when their retirement is happening next month or next year but that’s too late to do much on financial front with respect to savings… so they have limited options – stretch the corpus they currently have, ensuring liquidity, ensuring medical cover etc., to ensure a fairly comfortable living.

Few more suggestions that are common for all:

• Reduce expectations: This is first & foremost thing that one has to do when facing shortfall in retirement corpus. People would have dreamt a lot about their golden years & also planned some luxurious vacations or grand party for family members – but they should see the real picture.
• Cut expenses: In whatever stage a person is this is definitely going to help –check what are the discretionary expenses that can be reduced or removed. Also start making monthly budgets.
• Save more aggressively: Reducing expenses can give some more room for savings – but savings should be channelized in right investment instruments.
• Review and revamp investment portfolio: Investor’s experience with some particular asset class can be good or bad. That’s the reason most of the people have portfolio tilted towards single asset class be it real estate, debt or in some cases even equities. People should have a proper asset mix.

Are there any other options?

There are but they are even tougher:

• Scale Back Lifestyle: This is not just about cutting expenses but actually compromising few of needs. Difference between need & want can be judged by size of wallet – so we have to draw clear lines again. Reducing lifestyle drastically can be a painful thing so should be done in phased manner.
• Moving to a smaller city: Expenses in smaller cities are comparatively less than metros – you have a choice to shift there after retirement.
• Delaying Retirement: Working longer was not the actual plan but this is the last resort as actually there was no plan. You have to convince yourself that retirement is a boring idea or retirement is about retiring from 9-5 job but that doesn’t means that you stop working. Delaying retirement in which ever form it is have 3 benefits – more years for savings, conserving retirement corpus & less years in actual retirement.

Case of a person – who was bit late in preparing for his retirement

Last year I got a call from a prospective client, who was looking for his retirement in couple of years. He was in mid 40s & planning to retire as soon as possible. He was working in South Asia & sounding very positive about his financial situation. We enrolled him for financial planning but while filling data he was bit confused. He thought there is some problem in our excel sheet where we were filling his present cashflows. He was earning Rs 25 lakh every year but his net cashflows were showing negative figures & that too by 10%. He was not able to digest this – he never realized that he is in this situation.

Once data was filled picture was clear he had taken too many loans to buy properties including few personal loans. His 90% of the assets were in real estate & that too on loan to the extent of 80-90% of the value of the real estate. When we calculated some financial ratios – things were even scary. His solvency ratio was less than 15%.

First we suggested him to reduce some of his discretionary expenses, making paid up few endowment policies & renting one of the properties so that cashflow can be taken to positive territory.

Then came the tougher decisions of selling one of the real estate properties. We tried to explain him that he is closer to debt trap & also about risk associated with having all his assets in single asset class. He agreed to sell one of the properties – this helped him in reducing EMIs.

Now we had some different figures all together so we again constructed the plan from scratch. Still there was shortfall in retirement figures. In this whole period we tried to teach him a lot about finance. We suggested him 2 choices either adjust your lifestyle or delay your retirement by 3 years. He agreed with second choice and now he feels more relaxed & confident about his retirement.

There is a famous quote from George Foreman “The question isn’t at what age I want to retire, it’s at what income.”

If you have any question regarding retirement planning – feel free to add in comments.