Sushil (57), a regular reader of goodmoneying, contacted me last week for financial planning of his son Vikram. Vikram has recently joined a Multinational firm as a product manager and Sushil wanted him to lead a structured financial life from the start.
I invited them to my office and had a healthy discussion on Vikram’s aspirations, goals, understanding on money matters etc. In between I also asked Sushil about his plans, and how he feels about his personal financial management, as he is about to get retired in a year.
To this, Sushil replied that financial planning is for young India. They have the money and time frame required to plan, “hum to apni zindagi jee chuke” (We have already lived our life).
But even after such feeling, still he had lot many queries which he kept on asking in between my discussion with Vikram. Like – Should he continue or surrender the insurance policies? what is the taxation on the pension plans, what mutual funds would suit a retired profile, how can he generate monthly income etc.
Actually though he has his own reasons to escape following a structured approach, what he was not realizing was that he still has assumingly 25-30 years of life in front of him, with no fixed salary inflow in most of these years. Mismanaged finances can create havoc in otherwise peaceful life with no responsibilities.
The issue is not with Sushil only. In my experience I have met many people nearing retirement or retired, having the same views. They have different reasons for avoiding it, some are quite common in such profile. I have listed down few as below.
Why Retirees and Pre retirees avoid financial planning?
- No Goals –
It is general view that financial planning is a goal based exercise, which actually is true, but definition of goals is something where the confusion lies in. People feel that goal is something fixed and one-time event (Like buying car, house, vacation, saving towards retirement, children education etc.). It is something which has a certain fixed value, and thus one needs to chalk out an investment plan to achieve that goal comfortably.
But a Goal in true sense is what you want to achieve. It may or may not be a fixed certain event which requires a specific amount. Goal can be organizing and consolidation of finances, Goal can be arranging investments to generate regular income, Goal can be arranging for regular income with tax planning, Goal can be distributing the wealth among beneficiaries in a convenient and tax efficient way, Goal can be spending the limited income wisely etc.
Retirement itself is a big goal, and it’s not a one-time event. It’s spread out in multiple years which may demand planning/review at different stages.
- No Long term Horizon –
This is one of the biggest misconceptions among retirees that financial planning is for those having long term horizon, and since retirees can’t have such a long horizon, thus they avoid this approach.
Whereas financial planning is not one size fits all approach. It just requires you to have some horizon, long or short doesn’t matter. Your horizon, your requirement, your risk tolerance, your investments composition, your aspirations and other arrangements will take you to the structure best suited to you.
- Growth targeted Investments –
Nearing Retirement or Retirees feel that financial planning is all about investing to make money grow, and they are not wrong in assuming the same. When they see around, products are being sold with a return pitch only. Even financial planning is being sold with a pitch to make your money grow. And all this has led to confusion.
Growth is targeted while person is in Accumulation stage. Since Post-retirement itself is a distribution stage, so there’s no point having a high growth targeted allocation. Portfolio is designed with a target of Income generation.
However this is also true that not all retirees look for income generation, some wants to have a growth oriented portfolio too. As I said financial planning never works on one size fits all criteria, so before advising on products it looks at the requirement, and structure out the ways the goal can be comfortably achieved.
- Behavior biases leads reluctance to change –
Financial planning does not only involve making new investments, but it may also require you to come out of non- suitable investments. So, if you have some unwanted insurance policies, or some taxable deposits etc., financial planner may advise to redeem the same and invest as per the plan.
Here the behavior biases come into the scene, and the major being the Sunk Cost fallacy. Sunk cost bias is a tendency to continue to invest time, money and energy into something we know is a losing proposition, simply because we have already incurred, or sunk a cost that cannot be recouped.
It is difficult to accept that where you had been investing for the past so many years, is no longer a suitable product for you. But living in denial itself is not wise thing.
- Fee Fever –
When in your whole working life you have taken all financial services for “FREE” and even got some part of commission cut back from the agent you have dealt with, it is quite natural to find difficulty in paying the FEE to the professional.
You need to understand that even earlier it was you only who were paying to the agent though indirectly and that too for making the transaction only. But nowadays you can separate out the advice from transaction and pay for the service you like to have.
This fee fever is the reason which makes the retired people more prone to misselling, as they were sold with products that are good for the seller. Emotional buying also happens when seller convince them to invest in the name of grandchildren. Lump sum retirement benefits encourage them to invest money in Real estate…all actions are based on emotion without backing of proper calculations and structure directed towards a goal.
What should retirees do to overcome these misconceptions and behavior blocks?
First and foremost is the acceptance from heart that you require financial planning and this structure would be of help to you. No doctor can cure you if you don’t accept that you are unwell. And Treatment starts with diagnosing the cause, which in financials many times is your Money behavior. Be flexible to work on your attitude towards money.
Start with a Zero based budgeting concept. Assume that you are just starting your financial life with some baggage. This is what you have, and that is where you want to go. And figure out how best you can reach your goal
Financial planning may require you to come out of few old investments which may not suit your requirement. These may be the products which you have invested in with a view to support your retirement goal only. Discuss your apprehensions with planner and do what is best for you. Accept, it was a mistake and it happens. Move on. Do not keep clinging to your past mistakes. Its only when you close an old chapter you can start new. Please understand that when we remain in denial we continue to circle pointlessly.
Take help of professionals. Nowadays it is not difficult to figure out the difference between sellers and advisors. Approach a SEBI registered Investment advisor with your queries, and be ready to pay fee to the professionals, as they do not work for FREE.
This is a wrong notion that financial planning is only for the young, everyone at any age who wants to be organized and structured in financial life requires financial planning.
It is only that young accepts at early stage that falling into a structure is beneficial for long term, but retirees with an emotional baggage, good and bad financial experiences, and ample amount of time at their disposal find it difficult to adapt to a process.
Sooner you realize the importance of financial planning, better you will make your financial future. It’s not about savings or investments; it’s about enjoying the life that you have always aspired for.
What is your view on financial Planning for retirees? Do you agree with me that Post retirement financial planning is as important as pre retirement planning? Share your views in the comments section.