4 myths about retirement planning
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Larissa Fernand is the editor of the Morningstar India website. Adjustments for an Australian readership have been made by Morningstar Asia-Pacific copy editor Peter Arnold.
Retirement planning is difficult because of the numerous competing financial obligations we have, so it must be prioritised. Further, retirement plans should not end up being based on assumptions that have never been questioned.
Here are four pointers for people to consider when it comes to their retirement planning.
1) Retirement is not one phase
Robert C. Atchley, professor emeritus at Miami University, Ohio, developed six descriptive phases of retirement that represent a transitional process individuals go through when they permanently exit the workforce.
While they do not apply to everyone, they do convey the message that to view retirement as one long life phase is rather naïve.
It could be a very long stage, depending on the age you actually retire and your life span. But it is a multi-phase journey depending on your health, the health of your spouse, death in the family, the state of your finances, and so on and so forth.
Tied in to this subject is the notion that spending will be the same throughout retirement. Not so. Initially, a lot may be spent on travel. As time goes on, spending tends to concentrate more on health issues.
2) Do not exit equity
There is a common assumption that because of the well-documented risks associated with stocks, individuals need to get out of equities and into safer investments such as fixed interest once they retire. But inflation never retires and will continue to do what it does best -- erode the value of your savings.
Hence some equity exposure will always be necessary to provide growth. Of course, this decision should be taken after looking across the board at all the sources of income (pension, dividends, interest, rental income, annuities), all the assets and the overall allocation.
3) Retirement is not a destination
Life expectancy in Australia is about 80 years for men and 84 for females. That is just the average. If you are in reasonably good health, exercise regularly, eat healthy food and do not suffer from any chronic or acute diseases, you could reach your 90s.
That means if you choose to retire at the age of 65, your retirement period may well last for 20 years or more.