Mistakes to avoid while planning for retirement

Mistakes to avoid while planning for retirement



These four mistakes must be avoided when you plan for your retirement.

Retirement is an important milestone which cannot be ignored. People look forward longingly to their retirement. The proximate cause may be that they are fed up of the mind numbing routine of going to office, sucking up to the bosses, the stress inherent in jobs today & the toll it takes on one’s health etc. Hence many people would like to retire today, if they can. 

However, it’s not that easy. The reason – if one retires early, the survival period is longer. Hence, one needs a bigger corpus to retire with. However, since one is retiring early, one would also need a much bigger corpus much earlier in life which is a tough task. 

Retirement planning is to be taken very seriously. This is the only goal for which you would not be able to take a loan! 

Nor can you start working later in life, if you find yourselves underfunded. For most people, retirement at the superannuation age is good enough – for even after that there are still decades in which to do whatever one wants. But while planning for retirement, many of us make mistakes. 

These are best avoided so that we don’t end up with no wealth & have to depend on others for sustenance in later years. 

Pension as panacea – 

The pension word speaks to the deeps… but, it is not a great solution. Annuity rates are around 5.5-7%. Also, annuities are taxable as income making them a poor choice. The same is the case with all pension plans from insurance companies. Traditional plans can offer 5.5-7% returns. ULIP plans can offer potentially higher returns, but the risks are borne by the policy holder. But in all cases, annuities are taxable. Also, annuities remain the same throughout life, with the inflation making the value of those annuities a lot less over time. Hence, if your predominant vehicle for retirement funding is pension plans – you can be sure that the insurance company & your agent has certainly benefitted! One cannot say the same with you. 

Pick the pebbles as you go – 

Insurance agents offer laddering as a solution. They may suggest 20 endowment policies which will mature every year in retirement, ensuring that one policy matures each year, for the next 20 years. While that looks fine on the face of it, there are problems with that. Firstly, endowment policies tend to offer 5%-7% returns, which are tax free. But, the returns are low. Investing in a low yielding product for the long term would actually create a much smaller corpus at the end. For instance, if one were contributing Rs.10,000 pm for 20 years & one scheme yields 6.5% & another 10%, the corpus at the end of 20 years would be – Rs.49 Lakh & Rs.76 Lakh respectively. The difference is Rs.27 Lakh! The corpus in the latter case would be 55% more! Also, when one is putting money into insurance, flexibility is not there. One needs to pay consistently for a very long period. With life being as fluid as it is today, we need flexibility with our investments. That is not there with life insurance. One may be better served by a bouquet, which we will change as per the unfolding future – in which case the investment would be better aligned to one’s needs. The life insurance policy will mature, as per the policy tenure. Suppose lumpsum money is required at around retirement, that is not possible in an insurance plan. To sum it up, it is better to avoid setting up an income stream through insurance plans for they are rigid, inflexible, low yielding & without possibility of diversification & hence a concentration risk. 

Putting faith on FDs & other fixed income products alone - 

Many make this common mistake. They want all their money in FDs, Bonds, Small savings and the like, which are low on risk. But, these instruments will offer returns which are all subject to tax. Post tax returns hardly are able to beat inflation. In future, inflation makes things very hard if one is relies on such instruments alone. These people wrongly believe that in retirement, they should not take any risk. The biggest risk in retirement is not taking the required level of risk, which alone will make the corpus last longer. 

Property as a safe haven - 

People invest in property so that they may fund their retirement. There are many ideas here. Some people buy land, which they would like to sell for a handsome profit later to fund significant goals, including retirement. While this is fine on the face of it, there could be problems. Land appreciation is over hyped. While some land parcels have appreciated very well, it is not true across the board. Also, land is prone to encroachment, unless we monitor it closely. Residential & commercial properties are better in that respect. But again the appreciation is not good across the board and one could get caught on the wrong foot. For instance, in the past five years, properties in Hyderabad have given a negative return ( NHB data ), which would come as a surprise to many. Nor is this an isolated case. Several areas across India have offered poor returns, making property investments not a surefire option like it is thought. In case of properties, one may spend on interiors, upkeep, taxes, brokerage etc. which are generally not factored in the final returns. After factoring all these, the final returns may not be all that fabulous when the property finally gets sold. Further, there are taxes to be paid on sale. The other serious problem is the illiquid nature of property. It’s a difficult proposition to sell a property, especially on an immediate basis. If one wants to keep the property for it’s rental returns, residential property can offer about 2-3 % returns and commercial property can offer 3-6 % on the prevailing market price, all of which are taxable. Hence, the yields are low & may not justify the investments in property. 

Regular financial assets would be far better in terms of returns, liquidity, predictability, taxation etc. The important thing while going about retirement planning is to avoid these obvious mistakes. 

Happy Investing

Source:Moneycontrol.com