Think Retirement is a joint initiative between Tata MF and Wealth Forum, where we discuss diverse aspects of one of the most critical responsibilities of a financial advisor towards his investors: retirement planning. Our endeavour in Think Retirement is to provide advisors with insights and perspectives that can help them understand the various dimensions of retirement better and thus help clients prepare and execute effective retirement plans that enable them to live their golden years with dignity and financial security.

In offering retirement income solutions to clients, advisors often come across situations where the most efficient solution that their number crunching throws up is not acceptable to clients, and they then have to consider less optimal solutions, which may be more acceptable though not the ideal plan. Here's one such case: what will you do in this situation?

Take a hypothetical situation of an investor Mr. Rao, who has recently retired and has come to you for advice on investing his retirement corpus. He has Rs.60 lakhs to invest, is 60 years old, will need to plan for 20 years of retired life and currently spends Rs. 400,000 per year, of which you drill down and discover that monthly expenses are Rs.25,000 and Rs.100,000 is spent on an annual holiday. There are no other income streams that he can depend on. Mr. Rao is conservative, has never been a big fan of equity markets. His only brush with equity has been tax saving funds that he bought from time to time, which did well for him no doubt, but weren't able to persuade him to break his existing FDs to invest into equity markets.

The ideal plan

Before coming to you, Mr. Rao went to an advisory firm, Wealth Builders, who ran a set of numbers to show him how his expenses will mount over the next 20 years and why he will therefore need to invest in equity funds to ensure that his standard of living does not get compromised over the next 20 years. Wealth Builders explained to him about how SWPs work and showed him lots of numbers and scenarios on how an SWP strategy will over the long term prove beneficial, even if markets get volatile in the interim. They showed him a plan that would ensure that he never ran out of money, and never had to compromise on his lifestyle. Mr. Rao understood the numbers, but was distinctly uncomfortable with parking his entire retirement corpus in equity markets.

The acceptable plan

Not comfortable with the advice he received, Mr.Rao then went to another firm, Practical Wealth Advisors, who understood his predicament and offered him an alternate plan. They recommended investing Rs. 40 lakhs in fixed income oriented avenues that would secure for him a monthly post tax income of Rs.25,000, to take care of his monthly expenses. The balance Rs.20 lakhs was recommended to be invested in equity funds. When markets do well they said, feel free to draw down some of your profits to fund a vacation. If markets don't support, cut back on the vacation plan for that year. As your expenses mount over the years, this equity portfolio will also grow over time they assured him, which will enable him to meet his incremental expenses from drawdowns from this portfolio, without compromising on the principal invested. When Mr. Rao asked them whether this plan would ensure that he never ran out of money and never had to compromise on his lifestyle, they admitted that this may not be entirely possible over a 20 year timeframe. But they asked him a question: "Mr.Rao, would you rather stay uncomfortable with your investments every day, in order to protect your lifestyle, or would you make some adjustments to your lifestyle to stay comfortable and at peace with your investments? Will you willingly give up some of your annual holidays for example for securing peace of mind on a day-to-day basis on your investments?"

What's the right thing for Mr. Rao to do?

Mr.Rao sees a lot of merit in the question posed to him, and is struggling to give a clear cut answer. He wants peace of mind for sure, but the thought of sacrificing that annual vacation is not a welcome thought. After all, all retirement brochures show retired couples lazily strolling on beaches, enjoying the sunset in their golden days.

He comes to you, looking for guidance on helping him take the right decision. What would you advise him to do, in this situation? Share your views by posting your thoughts in the comments box below. These are situations which you as advisors often come across - situations where you need to trade-off between what you think is the ideal solution that your number crunching throws up versus offering a plan that may be less efficient, but more likely to be accepted and implemented. What will you tell Mr. Rao to do?

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