Retirement planning: It’s better to be roughly right than precisely wrong
Published by Mint
Abhishek Kumar's role: Wrote this article
Abhishek Kumar wrote this column arguing that retirement plans should rest on conservative assumptions, with higher inflation, lower returns and a longer life than past data suggest, rather than on precise-looking estimates.
What Abhishek Kumar said
Why do you say retirement planning should be roughly right rather than precisely wrong?
Because retirement is one decision most of us cannot redo. If the corpus runs short at 75, going back to work is rarely an option. So I borrow the accounting idea of conservatism and plan for the harder case: inflation a little higher than expected, returns a little lower, and a life a little longer. A plan built on precise-looking estimates can be exactly wrong; one built on cautious, rounded assumptions is more likely to survive the surprises that thirty years will bring.
How much inflation should I assume when planning for retirement?
Every household's spending basket is different, and it changes with age, so estimating item-by-item inflation from past trends is an exercise in false precision. I would rather anchor on the band the RBI is mandated to keep inflation within, whose upper end is 6 per cent, and then add a margin for the harder case. In my own planning I work with about 7 per cent, accepting that this is a deliberately cautious figure rather than a forecast.
Should I use past market returns to estimate what my retirement corpus will earn?
I would not lean on them. Past returns are no promise of future ones, and two things can go wrong at once: holding the same equity share for a whole lifetime is harder than it looks, and as an economy matures its growth, and with it returns from both equity and debt, may slow, as has happened in developed markets. So whatever a blended return works out to on paper, I would plan with a figure a notch below it and treat anything above that as a cushion.
How long should I plan for my retirement money to last?
Longer than the averages suggest. Life expectancy in India has risen sharply over a few decades, and planning for only fifteen years after 60 risks outliving the money. I prefer to plan to at least 85, and for a couple, beyond. Yes, the required corpus looks far larger under cautious assumptions, which for a household in its thirties usually means raising savings as income grows or trimming spending. But that is a problem you can fix at 35, not one you want to discover at 80.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on retirement
A Mint column on estimating a retirement corpus conservatively, by allowing for higher inflation, lower returns and a longer life than past data suggest. It works through the case of a couple in their 30s spending ₹1.5 lakh a month, whose required corpus rises from about ₹14.5 crore to about ₹26.9 crore under the more cautious assumptions. The column is written by Abhishek Kumar.
Publisher source
Retirement planning: It’s better to be roughly right than precisely wrong
