Is planning your retirement a relatively difficult task?

A client writes as follows: 78 is a relatively young age to be dying. All things considered, it has been an OK life. Initially, being in one of the first few batches of IIM Calcutta. Then, running into Sangeeta for the first time, when I went to watch Sholay. And finally, together bringing up a child who is now independent. While the job as a chief finance officer (CFO) used to be very hectic, it helped us to support both our parents and also pay for Aishwarya’s MBA in the US. My main regret is that I now realize that we should had saved a little more money— ₹60 lakh may not be enough for Sangeeta’s expenses of ₹10 lakh a year including the rent in Mumbai. She is 73 and healthy, so she might live for another 10 or more years.

I am still not able to make sense of this! I worked pretty hard for 34 years. Sangeeta and I were both frugal. And I did not make any massive blunders with our investments. Despite that, the outcome is worrying. Maybe I should have worked beyond the mandatory retirement age of 58. But even after paying for Aishwarya’s expensive MBA in the US, we had a net worth of ₹80 lakh. That was a decent amount of money 20 years back when our expenses were ₹3 lakh a year including rent. And the interest that we were earning on our net worth was more than one-and-a-half times our annual expenses, so our net worth was initially growing each year. Also, by then the heart problems had already started. So, becoming the CFO of even some smaller company in the same industry and continuing to travel five days a week would have significantly increased the risk of a heart attack.

Since the past cannot be changed, I must stay focused on the future. The Will naturally says that any investments that are in my name will go only to Sangeeta. Further, we have a health insurance floater policy of ₹10 lakh. However, if Sangeeta lives longer than the average, then she will run out of money. I must urgently discuss with Aishwarya whether she will be able to help. Making sure that Sangeeta will be OK even in the worst-case scenario is the most important thing right now!

Brief analysis by a financial planner:

For the sake of brevity, this is an oversimplified analysis which ignores many critical nuances and options. The interest on the net worth in the first year of retirement is almost irrelevant for the calculation of how much one should save for retirement. Due to inflation, it is normal for the net worth to increase during the initial years of retirement, then to plateau out, then to drop back to the initial amount and finally to rapidly drop towards zero. This is normal but it is counter-intuitive. And the high inflation in developing countries such as India makes this calculation even more counter-intuitive.

At his age of 58, let’s assume for simplicity that it was not possible to start a second lower stress career and they had already paid for Aishwarya’s MBA, so it was too late to take a student loan. Covering expenses till Sangeeta turns 90 means covering 37 years of expenses. The net worth of ₹80 lakh divided by 37 years means that they should have spent only ₹2.16 lakh in the first year of retirement i.e. 28% less than they were spending. Not fixing this right away made this problem worse over time.

Currently, the net worth of ₹60 lakh divided by ₹10 lakh per annum of current expenses means that the net worth may last for only around six years. So, this will cover expenses only till Sangeeta turns 79, which is less than her current average life expectancy. Covering expenses till Sangeeta turns 90 means covering 17 years of expenses. ₹60 lakh divided by 17 years means that Sangeeta can spend only ₹3.53 lakh per annum over the next year i.e. 65% less than she was planning to spend. So, they should drastically cut expenses and also speak to Aishwarya about whether she can help.

William Sharpe won the Nobel Prize for developing the capital asset pricing model. And he calls retirement planning the hardest problem in finance. This is because longevity, post-tax real-returns, insurance and the trade-offs between goals are all very difficult to predict. Further, this is an even harder problem in developing countries since they do not have the essential financial products.

Avinash Luthria is a Sebi-registered investment adviser and hourly-fee financial planner at Fiduciaries.in