Five big retirement-plan investing mistakes people don’t realize they are making

Jan 04, 2019 | 7 months ago | Read Time: 4 minutes | By iKnowledge Team

People tend to leave retirement planning until very late, they don’t factor in a  variety of points such as inflation, considering thatthe superannuation benefits from their employers will be enough.. These are big mistakes which they should avoid making.

Sunny Singh led a charmed life. His attitude towards life was to live well and enjoy. Born into a middle-class Punjabi household, he had a comfortable childhood. He breezed through his student years, acquiring an engineering degree, a management degree and ended up working for a multinational consumer electronics company, in a good position and a six-figure salary that rapidly became a seven-figure one. He married the girl he fell in love with and had two children as well.

Sunny earned a lot and spent generously. He was never in debt but he did not have substantial savings, though he always had four to five lac rupees lying in the bank. He had an insurance cover for Rs 50 lakhs for which he was vaguely aware he was paying premiums, he had some amounts in various fixed deposits and had a Public Provident Fund account. He had been meaning to invest in mutual funds but never got around to doing it, preferring instead to park his money where it was most easy. He had bought a house and already discharged 70% of the outstanding loan amount.

When he was 45 years old however and his elder child was 16 years, a chance remark by someone about college education expenses, retirement expenses, medical expenses made him take stock. He found that his financial assets amounted to little more than Rs 30 to 40 lacs. He had to put his two children through college and spend on their marriage. He had to accumulate enough money so that he and his wife could live comfortably when he retired. However, he had only 15 years in which to do it. Of course, he would get a significant amount from his Provident Fund when he retired but still, the question arises – is that enough?

There are many people like Sunny, who don’t worry much about the future, live in the present and spend all they earn thinking that their retirement is light years away in the future until they find that it is upon them and they have made very little provision for it.

Here are five retirement planning mistakes that people usually make:

  1. Not starting early: Most people do not start planning for retirement until they are well into middle life, that is late 30s and early 40s and sometimes even beyond that. There is no doubt that in our twenties, retirement seems like a long time away, but we have to realise that this length of time should be what we should take advantage of. The earlier we start saving and investing for retirement, the larger the corpus we can accumulate. We can take advantage of the power of compounding. If you started saving and investing at 25 up till the age of 40 and then do not invest anything else till your retirement at 60, you would still have accumulated a significant mount because that money would still be earning interest and appreciating.

 

  1. Not accounting for the time value of money: The value of money erodes over time. In 2003, the price of petrol in India was at an average of Rs 33 a litre. Now the same litre costs around Rs 80, more than double in value. Inflation has the effect of eroding your wealth. If you think that Rs 1 crore is adequate for your living expenses 15 years after retirement, you are most likely thinking about it in terms of today’s prices. If annual inflation is 5% then you will need to factor in the inflation. After 15 years, at 5% inflation rate, then Rs 1 crore would be worth only about Rs 48 lakhs.

 

  1. Investing in low yield securities: The value of money depreciates over time due to inflation. Therefore, when we invest, we need to invest in an instrument or security that offers a rate, which is higher than the inflation rate. If you invest in a fixed deposit that gives an annual interest rate of 7%, then your real rate of return would be only 7 – 5 = 2%, (assuming inflation at 5%). Most people opt for safe but low yielding securities that do not beat inflation and end up earning a negative rate of return. A good part of the corpus has to be in equities and in equity-linked investments, due to the simple fact (which has been proven by analysis) that over long periods of time equities outstrip all other asset classes in terms of performance.

 

  1. Relying only on their retirement funds: This is true of India, especially in case of those who work in state-owned companies. They think that the money being deducted from their salaries for Provident Fund and pension should be enough to look after them after retirement. While PF and pensions are safe investments and guaranteed besides, they are simply not enough after retirement, for all the reasons that we have mentioned before. You need something else as well as over and above the superannuation funds. People can think of a different type of pension plan to supplement the one provided by their company.

 

  1. Inadequate health insurance: People normally feel that after retirement they will be spending less, because their transport costs will be lower etc. They do not make allowances for increased medical costs or of any illness occurring when they are older. If any sudden illness overtakes us during retirement, an inadequate health cover will be insufficient to meet the expenses. There is a need to increase your health cover when you are younger and when the premiums are lower. As we grow older, it is important to have an adequate and comprehensive health plan that covers a wide range of illnesses (with minimum or limited exclusions) and it should preferably have the option of renewability through the life of the insured.

One such  retirement/Pension plan by Aegon Life answers an individual’s needs. Insta Pension Plan gives the policyholder regular income after retirement. This is a single premium retirement policy starting at a minimum premium payment of Rs 1 lakh. Depending on the annuity payment, one can get payments for life and the annuity payments can be annual or monthly.

Retirement is not the end of anything, but the beginning of a new phase of life. With increasing life expectancies, people are living longer and healthier lives. If you plan now, you can enjoy your retired life and maintain a good Lifestyle.

II/Dec 2018/4742


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