No One Perfect Plan

Gazillions of retirement plans tend to fail because they lack what an observant analyst may cleverly term the “the three critical Os”—objectified, owned and opportunistic. In other words, they are not opportunistic enough, there is an inadequate sense of ownership and, lastly, the extent of objectification leaves room for improvement.

But first things first. Let’s begin by stating the obvious—a “perfect” retirement plan cannot be defined quite precisely, primarily because the concept of perfection varies as wildly as the flora and fauna in an ecologically diversified forest. What is perfect for Tom could be, well, oh-so-imperfect for Jerry. Ergo, what we might look for in such cases are the traits of a decent retirement plan, one that covers all the issues that might be considered significant for the individual concerned.

Such a plan, in my weltanschauung (well, Germany is pretty organised when it comes to retirement-related legislation), should appear as ideal for the average retiree. The latter should keep it objectified at all times: make it unique in every way, and actually allow it to acquire a distinct personality of its own. This, in fact, brings to mind the old chestnut—an individual’s unique characteristics (read: risk-return profile and plenty more) should be reflected in the retirement plan he designs for himself.

There has to be an absolute sense of ownership too. The retirement-oriented thinker should appreciate all the positives he has built in the plan. At the same time, he should also deal with the negatives that might have come along on the way. These should be seen as inadequacies and failures, and corrective action should be taken at the earliest.

No decent retirement should be considered complete without an opportunity-seeker standing firmly behind it. And there has to be a lot of fine thinking when it comes to grabbing opportunities. Further, such thinking should be followed up by quick footwork as well. Else, the plan would fail to cope with changing circumstances or emerging market conditions.

Now that the brief preamble is well and truly over, my main narrative would deal with the basics of the three Os one by one. These, I must insist, should all remain in place simultaneously. Missing any one of these elements would result in an imperfect plan.

And The Os Have It

The first critical ‘O’: objectified. The plan should exactly represent the planner. This implies inclusiveness—all vital factors should be considered. Age, income level, assets, liabilities, expenses and so on are sacrosanct on this front. Elaborate worksheets for the whole nine yards are available freely, and I expect the retirement-minded person to pick up at least one of these. The final point of the exercise is to arrive at a precise risk-return metric—a significant step for the asset allocation strategy the individual would follow over a period of time.

Speaking of asset allocation, here’s the second critical ‘O’. The test of ownership would be the next filter for the individual. The latter should feel responsible for all the mistakes he commits; he should simultaneously rejoice in every achievement. The impact of both extremes would be clearly visible to him. If not now, the retiree would surely feel their influence later down the line. His mistakes, and let us be completely candid about this, would make sure that the plan fails to achieve the kind of perfection he deserves in the first place. In simpler words, basic objectives (like superior performance of certain assets chosen wrongly) would not be met.

The third ‘O’ relates to opportunism. The fact that an individual is not driven by opportunistic ideals would probably spell trouble for him. How and where an opportunity would arise is not for me to speculate. A new reform introduced by an earnest government, a brash product rolled out by a smart financial powerhouse, an overseas market that opened up in an emerging asset class—these could well appear as opportunities, and one should be ready to tap them in every way possible.

Nevertheless, the individual concerned should clearly understand the nuanced risks that might be involved in exploiting new opportunities. For example, real estate investment trusts (REITs) are coming up as a bold asset class for Indian investors and should be viewed in an open and positive manner. Now, whether such a product category is ideal for the retiree is not for one to advise. All I am suggesting is that the matter should be explored at length, and its relative strengths and weaknesses (in the case of REITs, the real estate market) should be analysed.

What Comes Next?

Okay, now that you have objectified the exercise, and are driven by a feeling of ownership, not to mention your eagerness to exploit opportunities, you might want to weigh a few points I have collated. Here goes.

The comprehensive retirement plan, being a sum of a number of moving parts, should involve all the tools and resources available at your disposal. Many of these would be digital enablers, and there is no reason for you to ignore them. Use them intelligently to work out the best solutions. And I am not just referring to answers to such rudimentary questions as “How much money do I need for retirement?” Life, for the diligent solutions-seeker, has significantly moved beyond simple retirement calculators.

No, I am actually alluding to tools that allow you to appreciate realistic scenarios, especially complete with risks. What would my annuity product really mean when inflation accelerates to a couple of notches higher after five or 10 years? If, say, I expect to retire after a decade, would my equity allocation be enough if it grows by 14 per cent? Or, may be a formidable question in the current context marked by modestly performing debt products: should I scale down my fixed-income portfolio by, let’s assume 25 per cent right now and move to high-risk (but potentially superior) equities instead?

A half-decent retirement plan would consider all such eventualities, but, as you would no doubt agree, the actual impact of the same would be difficult to predict, given the current set of constraints. In fact, let me be quite brash and underscore the sheer impossibility of it. However, as in all things speculative, predicting the future correctly every time is not everyone’s forte, and I am in the company of
the majority here.

The Other Os

As night follows day, the counter-forces are inevitable. These are not too difficult to identify either. Together, they would spoil the most well-intended retirement plan. I have collectively named these forces “The Other O’s”. I would reserve only the first for now; however, one of these days, I hope to discuss all of the others with readers. Well, if you have not guessed it, I am referring to over-exposure.
An over-confident retiree would tend to indulge in a dose of over-exposure—and, seriously, that would be rather unhelpful. Over-exposure to a potentially risky asset class (perhaps to certain price-sensitive commodities, to cite an example), would not help your case. On the contrary, it would have an adverse effect on portfolio performance. A poorly functioning retirement plan, mind you, is the kind of nightmare that everybody dreads.

The author is Director, Wishlist Capital