There is a tide in the affairs of men, or so goes an oft-quoted quip from Shakespeare’s vast body of work. For men, and I allude to the straight-laced citizens of this mighty land irrespective of gender; the tide in question comes in the shape of a poser. When should they begin to plan for retirement, now or later? And the answer comes pat: for most, it should start immediately.
I do not wish to be flippant, but experience tells me that hesitation on this front will be tantamount to foolishness. And when I refer to a retirement plan, I mean one that checks all the boxes. Ergo, a randomly purchased pension scheme does not fit the description, nor does an oddball investment in the alluring real estate. Ditto for a quick-fix allocation to a few star-grade mutual funds.
Instead, I mean a step-by-step programme, which must begin with the fundamental realisation that the right products must follow the plan. To disregard the need for planning strikes at the very root of personal finance. Far too many of us end up with needless real estate, funds, and insurance policies. As I said, an assembly of all sorts of investment products is not a retirement plan per se. Not when the motley collection hangs in an empty space not characterised by a proper plan.
Eyes On The Prize
An average individual needs to keep his eyes on the prize—his ultimate aspiration. To be specific, he wants to replace his active income stream (it will terminate when he superannuates) with passive, post-retirement income. This is always a challenge for the uninitiated.
How can passive income be ensured? Well, in the free markets that we see everywhere, there are few guarantees. Passive income, therefore, must come from certain assured income and market-determined products. The latter must be chosen carefully, especially because performance is spawned by skill, ability, luck and other factors, most of which can never be controlled by the individuals.
Control or the lack of it, indeed, forces one’s eyes off the prize. An investor with little or no direct control over his portfolio is likely to pay a hefty price. His transaction costs, for instance, may act as the spoiler. His overall returns may well be impacted by sundry fees, commissions, charges, and brokerages. Thus, cost awareness keeps the average retirement plan fit and fine.
The narrative seems particularly twisted insofar as the retiree’s exposure to insurance is concerned. Costs are indeed heavy, especially in the context of traditional plans. Endowments and annuities, both popular options in the insurance space, are often loaded with big-time expenses. ‘Buyer beware’ is the only advice in such a scenario.
To Each His Own
Each individual must craft his own specific plan and not opt for any universal metric. Each retirement-minded investor has a list of to-dos special for him. Think of an individual who may be a 35-year-old lady with family and a business to look after. But several factors will certainly make her unique. So borrowing ideas from others while planning retirement is one thing, but to copy blindly will perhaps be naïve, which has no place in the humdrum world of risk and returns.
Ultimately, the conjoined ideas of risk and returns will determine the efficacy of a retirement plan. On the grand stage of life, people are merely players who have their exits and entrances, genuine and honest plans are supremely important. The sooner we realise this, the better it is.
Nilanjan Dey, Director, Wishlist Capital