Nobel Prize-winning economist, William Sharpe (whom the Sharpe Ratio is named after), calls Retirement Planning and investing for it, “the nastiest, hardest problem in finance”.
If the above statement sounds like an exaggeration, it’s probably because the concept of Financial Planning is almost non-existent in developing countries such as India. A financially realistic illustration would help to illustrate one minor aspect of the above statement:
Let’s say that Achilles, who is 40 years old, has already saved enough for his children’s higher education and he is now going to start saving for retirement. He calculates that he has to save 40% of his post-tax salary for retirement, which leaves him with 60% to spend on a comfortable lifestyle.
Achilles eventually retires at the age of 60. If at that point he realizes that his earlier calculation was overly optimistic and corrects it, then he will have to cut down his lifestyle by 56%. However, if he unfortunately realizes this only at the age of 70, then at that point, he will have to cut down his lifestyle by 83%. In the extreme scenario in which he realizes this only at the age of 73, he would have completely run out of money and would be on his deathbed—unless his children bail him out.
The above illustration hints at the fact that, within Financial Planning, the component of Retirement Planning is the most complex. And since Retirement Planning and investing for it is the hardest problem in finance, it would therefore be prudent for almost everyone to partner with a competent Fee-Only Financial Planner and SEBI registered Investment Adviser.
- Avinash Luthria, Fee-Only Financial Planner & SEBI registered Investment Adviser
- Investor with 18 years of experience including 12 years as a Private Equity / Venture Capital investor
- MBA (Finance) from Indian Institute of Management Bangalore (IIMB)
- SEBI registered Investment Adviser i.e. a fiduciary
- Articles in Mint / Business Standard / The Ken / FreeFinCal