Sometimes, I do some financial planning on request. I am certified to do so but frankly, I don’t enjoy the exercise. Why, you may ask? I find myself turning into a psychological counsellor, rather than a financial one and that, I am not certified to do.
Typically, the exercise goes like this (true story):
First, you input your current age, choose the age you wish to retire and decide the age at death (ahem); lay down your current expenditure, estimate what percentage of it you will need every month when you retire, apply an inflation rate to arrive at the real figure. Then you add your goals, calculate their time values, add your current investments, estimate a rate of growth and let the software calculate how much you need to save every month from now on, to reach those goals. Neat?
Not really. Here is how a REAL conversation goes:
Client: Hey hey, the software says I need to invest X amount every month, which needs to grow at Y every year for me to retire at the age I want to retire and to meet my goals. Unfortunately, I can’t save that much every month – can you tinker with the retirement age, I think I need to work longer.
Advisor: Sure. *Extends the desired retirement age from 55 to 70, keeps the return expectation realistic*
Client: Also, I better die when I have chosen to die, else I am in trouble. Can you account for my living longer?
Advisor: Sure. *Extends longevity from 75 to 85*.
Client: Hmm, But even now, I can’t be saving the revised X AND maintain my lifestyle.
Advisor: Shall we take a relook at your expenditures?
Advisor: Perhaps, if you want to look at a peaceful retirement, when you may not be able to/like to work as hard as you do now?
Client: Ok, so now you are going to ask me to compromise on my lifestyle?
Client: Any other solution?
Advisor: Let us revisit your goals. Here you say, you want 2 vacations costing 3 lacs each, every year starting today. Do you think you would like to develop a kitty before you launch into this?
Client: But, travelling is our only passion. My spouse and I live to travel. What is the point working so hard if we can’t travel twice a year?
Advisor: Perhaps moving from a 2 bhk to a 3 bhk in a lifestyle property then, is not such a serious goal? I mean you still have your own home in Mumbai. The loan isn’t closed yet.
Client: Not at all. It is an absolute need. I want my kids to be able to live in the “heart of nature, right in the middle of the city”, I want access to a good gym and proper pool. Itna to banta hain at my level? (I am sure, I deserve this at my level)
Advisor: I suppose your children’s education in a foreign university is non-negotiable?
Client: Certainly. Let’s not even get there.
Advisor: Frankly, I don’t see a way out of this, unless you can get a job that allows you to save X, which would mean almost doubling your salaries.
Client: Yaar tu job dila de – (why you get me that job)
Advisor: Not possible right? So let’s revisit your goals and expenditures. I don’t see a solution otherwise.
Client: What is the return you are expecting from these investments? What, man? Please add another 5-6%, I am sure you can do that with your superior skills at asset manager selection.
Advisor: I am afraid, not.
Client: But equities have traditionally given 15% CAGR right? Are you saying India won’t grow at that rate?
Advisor: It may, but your risk tolerance doesn’t allow me to put 100% in equities, Plus we may have a few years of challenges now, given so many issues globally. Also, debt isn’t yielding much if we want to keep it risk free. Most importantly, equity dividends are now taxable, long term capital gains are taxable.
Client: Yaar, this is “too much information” – Kuch kar. (do something)
Advisor: Sigh. *Tinkers around with the expected rate of return*
Goals met on paper, client pleased, discussion closed.