Optimism about returns is not a good idea when saving for retirement: Here’s why – Economic Times


The path to meeting all your financial goals lies in evaluating how much you need and not assuming very high returns.

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How can you make more money out of your investments? There are many, many answers to this question, but only two sure-shot ones. One, invest more; and two, give it more time. Preferably, do both. To some people, this must be sounding like a joke, or worse still, a mocking answer. But it’s absolutely true. These are my personal solutions, the ones that will always work. I know that investment analysts are always supposed to come up with some magical technique, some combination of investment types and timings that will create some unlikely miracle like, for example, turn Rs 20,000 a month for 10 years into Rs 1 crore. Way too many people are looking for answers to questions like that.

However, some things can’t be done. Actually, the real problem is that this is not an intellectual exercise. At the end of that time, there is some real-life goal that has to be met by the savings. However, having an over-optimistic calculation just encourages people to save less. The reality is that we have no clue about what will happen. Everything that anyone says, whether an individual investor or an investment analyst like me or anyone else, is just a projection of assumptions and past trends. After 16 months of the virus, surely that’s obvious.

The correct thing to do is not to look for a more accurate prediction involving a higher return investment, but to realise that accuracy is not possible. What is the way around this? To appreciate that the unexpected will almost definitely happen. Moreover, surprises are overwhelmingly more likely to be negative than positive. To have more, save more, and save for longer. The biggest problem is that the overwhelming mass of people don’t save, or don’t save enough. Whatever they do save, they do it without real awareness, without projecting into the future, and thus without triggering the thought process that would lead them to save more and save better. In fact, all of us in the investment media are culpable because we try to focus so much on where to invest. This sends out a subconscious message that if your savings are not growing to some level that you want them to, then the way to solve that is to find a better investment. This is the dominant theme in all investment media and in all questions that savers ask about money. However, the true answer often lies in the fact that most savers don’t save enough.

What’s making this worse is longer life spans. In India, life expectancy at the age of 60 is now 17.8 years. As recently as 1990, this was 14.8 years. That large a change in the average means that some people— especially those with access to better nutrition and healthcare—are living a lot longer. We can see this around us. It’s very likely that this trend will continue. The flipside is that your retirement kitty may have to last 25 or 30 years. To do this, your savings will have to earn better returns, which, as we’ve seen is likely to be a challenge. Even if they can there is no alternative to saving more.

Most people just save whatever they can, or they save some arbitrary number driven by tax-saving needs. Instead, we’ll have to start projecting future needs and projecting backward from there to see how much we need to save. The best thing to do is to be pessimistic in these calculations— assume that needs will be higher and returns lower. This is not easy to do actually. The human mind (at least the mind of the kind of humans who invest!) gravitates towards optimism. Optimism is a great quality, but not while you are projecting your investment returns into the far future.

Also Read: Millennials don’t save, buy a house like older generation: Here’s why

(The author is CEO, Value Research)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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