The investment world is full of myths. At some point in history, these myths may have been true but over time, we term them myths as they do not hold anymore. In this blog, I am sharing the five big myths in retirement, which I believe may no longer be valid. If we continue with the same, it could potentially hurt us a lot in retirement.
Myth 1: Your expenses will reduce after retirement.
This is the biggest unknown in retirement. If we look at our grandparents and parents this may be true. But our lifestyles have undergone significant changes. Whether it is spending on travel or eating out, our expenses have gone up. We might be addicted to making impulsive purchases on online apps and pampering ourselves with the latest gadgets. Increasing longevity and advances in medical technology could all add up significantly to our expenses. At this point, it is difficult to predict whether our expenses will truly increase or reduce in retirement.
Solution: Your lifestyle will determine your expenses in retirement. Further, tracking your expenses should remain a priority so that there are no surprises.
Myth 2: The markets would continue to deliver similar returns in the future as they did in the past.
The biggest unknown in investments is market risk. No one knows what returns are likely to be delivered by the markets. Further, we do not know how volatile those returns will be. We all look at the past to predict what to expect in the future. It is akin to driving by looking in the rearview mirror.
The basic investment theory teaches us that investors want to protect their purchasing power. They do so by seeking compensation for inflation and volatility. Hence stock markets tend to produce higher returns in the long run as compared to other investment avenues. Having said that, there is a big unknown – what does the long term mean? There are 10 years periods in the Indian stock markets where the returns delivered were next to zero. What if you were caught out in such a time period? Further, the annual volatility (as measured by the high and low of the BSE Sensex in a calendar year) over the last five years is much lower as compared to our experience over the last 30 years. Equities are no longer seen as risky investments. This false sense of stability of our returns is the biggest myth that we are living through!
Solution: Your budgets should take into account the fact that future investment returns could be lower than what we have achieved in the past. If the markets deliver better returns, that’s great! If not, at least you have built-in some margin of safety for yourself.
Myth 3: You need to make all the changes to your investment portfolio as soon as you retire.
The day of retirement seems like the day you need to change everything in your life including your investments. This can cause a huge amount of damage to your wealth. Imagine you retire at a point in time where interest rates are very low. You would have invested at these low rates and when the rates increase, you are unable to adjust your investments to take advantage of the same.
Solution: Make changes to your portfolio gradually. Ideally, you should start making the changes 3 to 5 years before retirement, taking into account the market conditions or taxation. I strongly recommend you make a Sample Retirement Plan (SRP) much before you retire so that you can learn to adapt to changes to market conditions and taxation.
Myth 4: Invest everything in Fixed Income or Debt
This is the biggest myth that can hurt you in Retirement. Yes, you need to be investing for safety and regular income but 100% investments in government bonds or Bank Fixed Deposits or Debt Funds are not the answer. Inflation erodes into the buying power, albeit slowly. The impact may not be visible in the short run but is certainly dramatic in the long run. You will lose 70% of your buying power in 30 years even if inflation just averaged 4% p.a. during this period.
Solution: You need a diversified portfolio. You are not going to need all the money that you have immediately. Some portion of your investments can be made with a long-term view. I would encourage you to start with a portfolio of 70% in debt or 30% in equity. You can adjust the ratio, either way, basis your risk tolerance but it cannot be 100% in debt.
Myth 5: Your support system will remain the same throughout your retirement.
Investing is a team sport. Even if you manage your investments, you do seek information from your friends or family. You could be investing with the help of your advisor or your bank RM. Irrespective of the way you invest, it is unlikely that your support system would remain intact. If you invest directly, what happens at age 70 or 80 where you no longer have the capacity to manage your investments? What happens if your advisor decides to retire and shut shop? Do you really want to trust your banking RM (who changes every few years) with your entire retirement corpus at the age of 70 or 80? These are some unique challenges that we all will face during retirement, and will only increase the longer we live.
Solution: Keep it simple! Your retirement plan should be such that even if one or more parts of your support system crumbles, it should be simple enough for you to manage without much of a hassle.
Conclusion
There are several other myths that I can discuss but I believe that the above five are the ones that can have the biggest impact. We have no choice but to make some assumptions as we build our retirement plans. All we need to do to make our plans robust is to ensure that it is built with some margin of safety, should our assumptions not hold true!
