5 Retirement Planning Mistakes to Avoid in 2018
Anecdotal evidence suggests that more and more people are starting to take the Retirement Planning seriously. Indeed, that’s a wise move, when you consider that in a worst-case scenario, you can take up loans to fulfil your other goals; but no such loans will be available to you once your income stream stops for good. Besides your day to day expenses, you’ll also have the inevitable set of medical expenses to take care of. If you’ve decided to take a serious shot at accumulating a sizeable retirement fund, here are five all too common mistakes you should be avoiding this year.
Because Retirement Planning is typically a long-range goal, even seemingly small delays could have a profound impact on the size of the final corpus that you’ll end up accumulating. For example: the delay cost for a 30-year-old who postponed his 30-year retirement saving of Rs. 20,000 per month by just one year, could be as high as Rs. 80 lakhs! It’s best to start with whatever is comfortable for you, and build it up as you go along.
Playing it Safe
Too many people end up letting their risk profiles dictate their choice of investment while saving for their retirement. In fact, studies suggest that fixed deposits and provident funds are still top choices for most Indians when it comes to Retirement Planning! This is a bad idea. In the long run, the volatility associated with equity markets tends to smoothen out significantly, and those who stay invested for the long term in higher risk equity-oriented assets usually end up making far superior returns to those who play it safe.
Buying Life Insurance
When it comes to your Retirement Planning, traditional Life Insurance plans should be a big no-no. And although there’s a small case for investing into low cost ULIP’s for your Retirement Planning, the fact is that much better options exist compared to them, in the form of Mutual Fund Investments. Traditional Plans lock in your money into very low returns (usually 4% to 6%) and resultantly barely help you outpace inflation. The stringent rules with respect to surrender values typically lock clients into the vicious cycle of throwing good money after bad!
Many of us choose to conveniently ignore the detrimental impact of inflation over the long term, during the Retirement Planning process. This is a fatal mistake. Assuming a 5% rate of inflation, a 30-year-old spending Rs. 50,000/month today will need approximately Rs. 1.85 lakhs/month to spend in the first year of his retirement! Make sure you don’t plan for your future expenditures in today’s terms. A lot is bound to change between now and then!
Prima facie, annuities can seem like a tempting proposition – as they guarantee you an income stream for the rest of your life. But if you’ve retired recently with a lump sum, buying an annuity is one of the worst things you can do. You’ll end up locking yourself into a yield of just 8% to 9% per annum, with no corpus to access in case of emergencies. Unless you choose an annuity with a return of purchase price, there’s no ‘maturity value’ in the picture either – and if you do choose the return of premium option, your annual income drops to abysmally low levels. Think long and hard before you annuitize!