18 May, 2015

Conviction sometimes comes in the way of retirement planning

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 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 this article of our Advisor Insights series within Think Retirement, one of Mumbai's best known and most successful financial planners - Suresh Sadagopan of Ladder 7 Financial Advisors, takes us through an actual case study that vividly demonstrates that retirement planning is much more than putting numbers together in a retirement calculator. Successful advisors understand that retirement planning is more of a mind game than a number crunching exercise.
Conviction sometimes comes in the way of effective planning

We all believe in what has worked for us. That is why we find clients who swear by property/ equity etc., inspite of any facts that could indicate to the contrary. Our experiences fortify our conviction. And clients come to us with firm beliefs, bordering on being an article of faith, which sometimes comes in the way of proper planning.

We have had our share of such clients who do not allow us to touch their pet assets. For lots of them it is property. For some, it is their equity share which they have invested 30 years back, which has grown manifold and is like family heirloom.

Assets created overtime, financial or otherwise, should serve a purpose. There is no point in getting emotionally attached to the assets. But many do.

The case of Mr. Madhusudan Rao

We found that to be a problem in case of Mr.Madhusudan Rao, who was on the verge of retiring. He had three properties. He was staying in one of them. He had some financial assets but not quite enough to get by in retirement. A retirement corpus of about Rs.50 Lakhs would probably not last another 30 years, we tried to tell him. We wanted him to liquidate his other two properties, which could bring in about Rs.1.2 Crores. But Mr.Rao was not game for that, as he wanted to hand over the properties to his children. We could not persuade him and had to let it go for the moment. That was about two years ago.

The situation has changed a bit now. He has been experiencing the deleterious effects of inflation and his expenses have gone up by over 20%. He was aghast when we met last month. He started understanding that his corpus may not last the entire retirement period. We saw the change of mood and renewed our efforts to augment his corpus by selling off the property.

We got support from unexpected quarters - his son and daughter. We had confided in them that their parents are not well funded for retirement, if they were to rely only on their financial assets. We mentioned that the best course for their parents would be to sell off the other two properties and invest in a way that they could live their life in comfort. This struck their children as logical and they became our allies.

They started working on their parents, who would not even want to hear of selling the properties. For one, those properties were bought in the distant past and they had even stayed in them. They had sentimental value. Only one property was giving them a rental of Rs.12,000 pm. The other property was under lock and key. The Raos go to that home once in six months and spend a few days, again for sentimental reasons.

We had even asked Mr.Rao, if he is willing to relocate to the other home, if he likes it so much, and sell off the current home. He did not want to do that as well.

When we visited a few days later, Mr.Rao was in a frame of mind to atleast consider liquidating one home. He had found out that the home which is under lock and Key, can fetch him about Rs.55 Lakhs. He also understood that this inflow can dramatically alter the cashflows and could allay his worries on the dwindling corpus.

We latched on to this... we decided to focus on only this house and ran the numbers for him. It showed that the enhanced corpus could last for another 24 years, assuming an inflation of 7% and a corpus return of 8%. But, this was assuming just the basic expenses. If we take into account some amount of travel & leisure activities, the corpus would last for even less time.

Mr.Rao saw the calculations and was in deep thought. He sighed and said sadly that even if he is willing to sell one house, it was not working out. The statement showed that he had resigned to the idea of selling a property.

We talked about the bright side. We told him that the sale would see them through relative comfort for over two decades and if needed, he can always fall back on the other property he has. That ofcourse he knew... we were able to understand what possibly was going on in his head… he was not worried about himself; he wanted to pass on a legacy to his children, which he may not be able to do.

Retiree's dilemma : secure own retirement or pass on a legacy

This, we see is a major problem in retirement planning as there is a strong urge to pass-on a legacy. This urge can come in the way of retirement funding, as a good portion will be out of bounds for such planning. This, I would see as the major task for any financial planner/ advisor. The family in retirement has to be convinced to deploy their assets for tackling their retirement and subordinate the legacy goal to this. As in this case, children are not looking for legacy from their parents, for most part. They want their parents to be comfortable. Children are natural allies of financial planners, in that, they can be relied on to convince their parents to move their assets to cash, for setting up a retirement cash-chest.

In summary, convincing the couple to liquidate their immovable assets is one of the important steps in retirement planning. Making them overcome the pangs of not being able to pass on a substantial legacy to their children, is another obstacle to be surmounted. Children can be co-opted in the effort to persuade their parents to liquidate their assets, in the interest of comfortable retirement.

Mr.Rao would now be comfortable. We did not push him on the other property. He has started approaching brokers for selling one property. His children are helping him now, in that effort. In time, Mr.Rao would start enjoying his retirement years once he gets over his pangs of losing his precious property!

Author : Suresh Sadagopan   |   Article published on Wealthforumezine.net 

No comments: