Do not be frightened by spreadsheets while planning for retirement.
Ravi wanted to start planning for retirement, though he was twenty years away from retiring. Ravi had wiped out all his liabilities and was in a position to save money for retirement. He had read about financial planning and decided to call a financial planner for retirement advice.
The financial planner (planner) fixed an appointment to meet Ravi, but before that he sent in a big questionnaire to be filled. The planner claimed that he required the questionnaire for devising the best financial plan for Ravi. The questionnaire included questions on Ravi’s lifestyle, ambitions for his children, wife’s spending habits etc. Ravi filled in the questionnaire and sent it to the planner.
The planner came to meet Ravi with a laptop and opened an excel spreadsheet. The spreadsheet showed how much Ravi would have to save every year for twenty years to lead a good retired life. The spreadsheet was detailed and had taken into account many eventualities including inflation, future leisure requirements, medical needs, old parents support, children’s requirements, wife’s requirements etc. However, the amount Ravi was required to save for the future was mind boggling to him. The spreadsheet showed that Ravi had to save 50% of his total income every year in assets generating 17% returns for 20 years to lead a comfortable life.
Ravi became worried. The planner had told him that if he did not invest in a mix of equities, debt, gold, property and insurance, Ravi’s retirement life would be financially troubled. If Ravi had to save 50% of his income in saving for retirement, he and his family would have to give up many luxuries such as holidays, driver for cars, golf for Ravi, club for his wife etc. In short Ravi will be only earning and saving for retirement and not doing anything else. The outcome of the projected investments was only on paper and there was no surety that the returns of 17% will materialise and that was a bigger cause for worry.
Ravi then spoke to his friend with whom he consults on investments. Ravi told his friend about the readings of the financial planner and the spreadsheet exercise. His friend, a sound and practical man, told him to forget about the spreadsheet and not get carried away in saving for retirement.
Retirement planning, according to Ravi’s friend is all about practical investing and not about worry investing. If one goes by spreadsheet analysis, one will be investing in the wrong asset class at the wrong time. The very apparent example is the 401K investing done by US citizens. Workers approaching retirement age were told to invest in equities for retirement, but the equity markets did not perform at all for over ten years, thus giving them no return at all for retirement. Retired workers in the US do not have any savings to fall back on due to poor equity market performance.
Ravi’s friend advised him to save, but save smartly. Choose asset classes that are not highly priced and are capable of giving good returns down the line. Equities are good if many factors are favourable for equities including depressed markets. Highly speculative equity markets will lead to heartburn for long term savers. Similar is the case for bonds, commodities and real estate.
Profits, if looking abnormal is meant to be encashed. Losses are meant to be taken if there is potential for further losses ahead. There is no such thing as buy and hold for retirement.
Ravi took the advice, stopped worrying about giving up current luxuries and started saving smartly by taking professional paid investment advice from his friend.