The real strength of a formal retirement plan does not lie in its execution or in any of the transactional aspects it is commonly associated with. Its true power is derived from the fact that it allays our fears and gives us hope. A plan and the intention to implement it is something that keeps an active income-earner going even during the transient, but worrisome phases marked by dwindling savings and emergency draw-downs.
An average individual with a functional retirement plan finds it easier to identify solutions for problems that may range from market upheavals to temporary diversion of funds. So, let us zero in on three key aspects of a formal plan. It so happens—and this is curiously coincidental—that these may be collectively termed the ‘3As’. We are referring to Access, Administration and Adaptability. Let us briefly deal with each of these.
A retirement plan should at all times be fully accessible to the individual. Accessing a plan is akin to controlling one’s own resources, free from conditions, such as liens and other legal encumbrances. An investor can lose control if he/she is overburdened with debt or sundry liabilities. In such debilitating circumstances, the individual will be unable to direct the available resources in the desired manner or for optimal gains.
A lot, of course, will depend on the administration of the plan—the manner in which it is executed. Naturally, the individual will need to harness all assets, compound their returns, and minimise their risk. But at the same time, costs must be also monitored so that the net performance is not greatly impacted. An efficient retirement plan is one that is managed well in all respects.
That brings us to the final aspect, adaptability. In an uncertain world, where markets can swing wildly, adaptability is said to be the most important determinant for success. A plan that remains inflexible, one that is rarely changed, is bound to falter sooner than later.
Flexibility is the very foundation on which the edifice of a retirement plan will stand. An individual whose life-stage changes must also tweak his/her plan in keeping with such an alteration. Risk profiles, as all financial planners will vouchsafe, can change on account of job losses, divorces, child births, early superannuation, and so on. There could be other reasons, too. The short point is that most changes in risk profile are sudden and irreversible in nature. This very characteristic poses a great challenge for investments.
The challenge, in fact, is a lot acute for the retirement-minded individual. They must take immediate steps to address an evolving situation. Delays could be potentially dangerous for their plan, as returns would suffer as a consequence of such delays. A plan that does not deliver in terms of returns is laden with flaws.
This, therefore, underscores the very significance of flexibility. A retirement planner must be ready for the evolutionary process, complete with newer elements.
Asset allocation, for instance, may have to be reconsidered as a result. An investor who has built a large equity stack may have to pare their allocation to stocks and opt for some fixed-income instead.
Experience shows that a flexible retirement plan stands a better chance of survival. This is especially true in the modern context, where people might be laid off from their jobs because of organisational restructuring. Such drastic and shocking changes happen all the time these days, irrespective of the sector or industry.
The sheer number of early retirees that we see all around us is proof enough. One need not necessarily turn 58 to call it a day; an army of workers in their early 50s showcases a certain trend.
The market remains the final arbiter —it determines whether the plan at hand is indeed an efficient one or not. A plan, which, say, in 20 years, delivers merely in single digits after inflation, is not an efficient one.
A very intimidating number of people have suffered because their plan was too conservative in the first place. They had loaded up on debt or income-bearing instruments in an effort to minimise risk. On the contrary, equity should have been their first choice. It was thus an altogether wrong decision that one can see in hindsight.
Imagine a young investor who has 75 per cent of his wealth “secured” in slow, income-generating assets. To put it bluntly, this is as needless as it is foolish. Clearly, a similar exposure to equity is the right prescription for him. Given his age and station in life, he needs to adopt a new investment philosophy. Similarly, a near-retiree may not allocate to extremely risky assets with wild abandon.
These scenarios, we must remind ourselves, are all text-book cases. The two individuals described here are stereotypes. Each investor is unique and a specific individual’s reality may be vastly different from such archetypal cases. So let us not club everybody together and devise universal plans as these plans will not be successful.
The market is the very message. It opens up to each of us in a unique way; there is hardly a universal rule that applies to all of us in equal measure. Ergo, each retirement plan must have a special raison d’être.
So here are a few standard norms for all participants to remember. Let them serve as the codes, which should be embedded firmly in their retirement plans.
1. There is need for a specific plan for everyone. The emphasis here is on the sheer uniqueness.
2. Diversification is non-negotiable. A plan must be comprehensive and all risks must be acknowledged.
3. Returns, the individual’s inalienable pursuit, can never be generated without risk. Usually, but not necessarily, returns will increase when more risk is assumed. Performance (reward) may be considered de rigueur, risk is certainly a lot more ingrained and regimented.
4. Asset allocation is not sacrosanct. It should well change with the passage of time. An investor must wake up to his latest reality and tweak his allocation strategy.
5. All costs and expenses are the individual’s own. He must make sure that these do not eat too much into his wealth. The corrosive impact of inflation too must not be misjudged. Woe betide the hapless investor whose performance does not outstrip inflation!
By Nilanjan Dey, Director, Wishlist Capital