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Many people prioritise other financial goals over retirement. However, given that inflation, expenses and income levels are uncontrollable, retirement planning should start early.
To help MFDs/RIAs create a sound retirement plan for investors, the latest episode of ‘Lessons from the Master’ hosted Suraj Kaeley, Independent Consultant & Coach.
Suraj in conversation with KS Rao, Head - Investor Education & Distribution Development, Aditya Birla Sun Life MF shared three simple steps to approach retirement planning:
Step 1 - Nudge clients to start saving for retirement
Usually, young investors are not in a rush to start planning for their retirement. Here, continuous and regular engagement can nudge them to start early.
For other category of investors, taking an ‘adequacy test’ serves as an eye-opener and encourages them to start investing. The adequacy test is nothing but deriving the surplus after accounting for all expenses (current and anticipated) post-inflation.
Also, asking relevant questions can leave investors with some food for thought. For example, ‘What if you can retire early and yet your expenses can be taken care of?’ or ‘How will you meet the soaring expenses once your income stops?
Step 2 - Design a retirement portfolio close to reality
Retirement planning is based on assumptions, which constantly keep changing. Thus, unlike other financial aspirations, retirement planning may take a comparatively longer duration.
Don’t create a hypothetical plan through number crunching. Instead, focus on asking relevant questions to strike a meaningful conversation. Also, engage in quarterly discussions to understand the changing dynamics. This helps in determining the most suitable asset class and a retirement portfolio that is close to reality.
Step 3 – Tweak the variables for a solid retirement plan
Tweaking variables can help in creating a solid retirement plan. Years of service, monthly expenses, and return expectations amongst others are all variables.
For an investor who has started investing late, illustrate how deferring retirement by a few years can reasonably contribute to creating a corpus. Likewise, if an investor is looking at a certain amount of monthly expenses post-retirement, propose a reassessment. A 10% reduction in expenses is rational to suggest.
Lastly, as return potential varies according to asset classes, encourage clients to align investments with their risk capability. With compounding coming to play, even a percentage of higher return can make a decent contribution to the retirement corpus.
