In Your Thirties? Avoid These Common Retirement Planning Mistakes!

Planning only for your Child’s Education

There’s nothing wrong with aspiring for a great education for your child, but it would be a mistake to shovel away every last saved penny towards your child’s education, without paying heed to your own retirement. Remember, you’ll be able to avail education loans for your child’s education, but not for your own retirement. The interest on these loans is fully tax deductible too. Also, would you really like to become a financial burden on your kids at a time that they’re just finding their feet in their careers?

Being a Low Risk Taker

When it comes to Retirement Planning, don’t think twice - just divert your regular retirement savings (such as Mutual Fund SIP’s) into an aggressive investment such as a mid-cap-oriented equity fund anyhow. When it comes to Retirement Planning, high risk/ high return Mutual Funds Sahi Hai! If you allow your individual risk tolerance to dictate your choice of retirement savings avenue, you could end up retiring with lakhs of rupees – if not crores – less. Be careful, as a 5-6% difference in annualised returns compounded over three decades, is a lot more than you think.

Choosing the NPS over Mutual Funds

Sure – the NPS is a low-cost investment, and represents a massive improvement over traditional endowment life insurance plans and fixed deposits; but they need more reforms before they can become your one-point retirement solution. For one, the NPS bars you from taking more than a 75% exposure to equities. In addition, your equity allocation is mandatorily slashed by 4% every year after your 35^th birthday, and this can hamper your long-term returns. While the NPS is definitely worth considering, make sure that the lion’s share of your retirement savings still flows into Mutual Funds.

Getting stuck into a Pension Plan

Buying a pension ULIP is an avoidable step on your retirement planning journey. After all, when your pension ULIP matures, you’re permitted to withdraw just 1/3^rd of the funds tax free under section 10(10D) of the income tax act. The remainder, you’ll need to put away in an annuity that’ll give you a post-tax annual yield of just 5-6%, depending upon your tax bracket, and the option you choose. Just stick with regular Mutual Funds or bluechip stocks during the accumulation phase.

FAQs

1. Why shouldn't I prioritize my child's education over my retirement savings?

While it's natural to want the best education for your child, allocating all your savings to this goal can jeopardize your retirement. Education loans are available and often come with tax benefits, but there are no loans for retirement. Ensuring your financial independence in retirement prevents becoming a financial burden on your children later.

2. How does being a low-risk investor affect my retirement corpus?

Being overly conservative with your investments can lead to significantly lower returns over time. For instance, a 5-6% difference in annual returns, when compounded over three decades, can result in a substantially smaller retirement corpus. Incorporating higher-risk, higher-return investments like mid-cap-oriented equity funds can enhance your retirement savings.

3. Is the National Pension System (NPS) sufficient for retirement planning?

While the NPS is a low-cost investment option and an improvement over traditional endowment plans, it has limitations. It restricts equity exposure to a maximum of 75%, and this allocation decreases by 4% annually after age 35, potentially hampering long-term returns. Therefore, it's advisable to allocate a significant portion of your retirement savings to mutual funds for potentially better growth.

4. What are the drawbacks of investing in pension ULIPs for retirement?

Pension Unit Linked Insurance Plans (ULIPs) have certain limitations. Upon maturity, only one-third of the funds can be withdrawn tax-free, while the remaining amount must be used to purchase an annuity, which may offer post-tax annual yields of just 5-6%. This structure can limit the growth and flexibility of your retirement funds.