Investing Mistakes to avoid pre and post retirement

Financial security and freedom in retirement does not just happen. It takes a lot of planning, money  and commitment.

Ways to Prepare for Retirement

1. Start saving, keep saving, and stick to goals

The sooner a person starts saving, the more time the money has to grow. Saving for retirement should be a priority. And it is never too early or too late to start saving.

2. Knowing one’s retirement needs

Retirement is expensive. Experts estimate that a person earning a lesser income needs at

least 70 percent of the pre retirement income and one earning a higher income needs at least 90 percent or more – to maintain one’s standard of living when he/she stops  working. It is better to take charge of the financial future beforehand. The key to a secure retirement is to plan ahead.

3. Being Realistic About the Jobs or Hobbies one Want to Pursue

Financial planners often advise one to spend less money in retirement than one did while working. However, taking on an expensive hobby can cause the monthly bills to skyrocket after retirement. Before splurging on new experiences, it is better to test the waters gingerly to make sure whether one really can afford to spend the money and time. Striking a balance should be the goal. Retirement always allows the person to enjoy the fruits of labor, but one thing to note is never to go overboard with the expenses.

4. Consider basic investment principles

How one saves can be as important as how much one saves. Inflation and the type of investments a person makes play important roles in how much the person saves at retirement.

One should know how the savings or pension plan are invested, understand the plan’s investment options and ask questions, before deploying their hard earned savings in different types of investments. By diversifying this way one can reduce risk and improve return. The investment mix may change over time depending on a number of factors such as age, goals, and financial circumstances.

Financial security and knowledge go hand in hand.

5. Leave retirement savings untouched

It is better not to withdraw retirement savings like EPF, PPF while working, and utilise for short term goal needs, like property purchase. The retiral benefits is one such investment, that grows with compound interest over time and are tax fee . Withdrawing retirement benefits pre maturely will make the product less attractive, with loss of tax benefits and interest loss.

6. Downsize the Home

It is always better to consider moving out of a large family home into a smaller, more affordable home much before retirement. In this way one can free up a lot of money to save for retirement. One should look for a smaller home that requires less upkeep and is easy to navigate. More so, relocating doesn’t get any easier with age. If anything, it becomes more difficult. This option would work much better than a reverse mortgage option for some people, with the high interest costs charged on reverse mortgage.

7. Reduce Monthly Expenses

Downsizing to a smaller, less expensive home also helps prepare one for retirement by lowering the person’s monthly expenses.. By moving to a smaller home, one can thus also save money on utility bills, insurance premiums, property taxes, and maintenance costs.

What are things one must avoid in retirement planning?

We will discuss some of the aspects one must keep in mind while planning for retirement.

Mistake 1: Settle for a random number

A lot of people settle for a random large number as their retirement corpus. For instance, people will target a corpus of Rs 50 lacs or Rs 1 crore or Rs 2 crore for their retirement. How do they arrive at such number? Just like that. A big number should be a good number. So, no serious thought goes into it.

There are many online calculators available. Planning for retirement is one of the most complex financial goals since it involves a series of cash outflows over a long period of time. An individual must seek assistance of a financial planner and understand what expenses would be needed in retirement and how to plan for the same.

Mistake 2: Ignore inflation

Everyone complains about inflation. Surprisingly, not many account for it while calculating retirement corpus requirement. Most rely on vague mental calculations to arrive at retirement corpus.

This is a mistake many investors commit. What about inflation?

Retirements can be long. At 30 if monthly expense is Rs 30,000, by the time one turns 60, the same will rise to Rs 3 lacs (assuming inflation of 8% p.a.). By the time the person turns 85, Rs 20.6 lacs per month will have the same purchasing power.

Mistake 3: Ignoring medical expenditure

This is especially true for younger investors. They have never had a prolonged hospitalization. Hence, they cannot relate to the high cost of medical treatment. Even a minor surgery can run into a few lakhs of rupees. As one grows older, even health insurance starts getting expensive.

One must be practical and plan.

On retiring one may still need health insurance and need to plan for an adequate medical emergency corpus too. Health insurance may not cover all the expenses.

Mistake 4: Touching EPF and PPF corpus before retirement

This has more to do with investment discipline. Sometimes, we do a few things just because we can do it. People withdraw their EPF balance when they switch jobs. When PPF account matures, they find ways to use that money.

Both EPF and PPF fall in the EEE (Exempt-Exempt-Exempt) at least as of now. Hence it is better not to withdraw it before retirement and one can build a sizeable corpus with them.

Mistake 5: Not purchasing a house

Sometimes, we can get too technical trying to figure out the best financial decision. Buy or Rent always makes for a good debate.  But purchasing an affordable house makes sense and it should be a high priority in the early years. It is creating an asset in one’s name which can provide for financial security for the long term and estate planning

Mistake 6: Delay retirement planning

Just arriving at retirement corpus is not enough. One has to invest to build that corpus too.

Most of us wait till the repayment of house gets over and other major life goals such as children’s education and marriage get over before we get serious about retirement planning.

One must not do that or it might get too late.

One can start small and still accumulate a large corpus. Never underestimate the power of compounding

Mistake 7: Purchase annuity too early

The earlier one purchases, lower the annuity rates. Annuities can be a good option late into the retirement when one’s health may hamper ability to manage wealth. The annuity rates are designed in such a manner that the payouts would be higher in the later years.

Mistake 8: Stay within comfort zone and not diversifying assets

Thinking beyond real estate, fixed deposits, gold and provident fund and consider equity mutual funds and direct equity

The money one has is essential for life ahead and it is important to invest it wisely. Seeking advice of a certified financial planner and getting a personalized investment advice is absolutely sensible.

Generally speaking, one should invest some part of the total corpus in the following investments.

1. SCSS:

Senior Citizen Savings Scheme (SCSS) is available for all Indian citizens above the age of 60 years. The maturity period for the investment is 5 years with an annual interest rate of 9.3%. One can invest a maximum amount of Rs. 15 Lakhs under the scheme. All investment under this scheme qualifies for the benefit of Section 80C of the Income Tax Act.

 2. Mutual Funds:

Depending on the amount of risk one is willing to take, it would be good investing some money in equity or debt funds.

SWP option in Mutual Funds

Systematic Investment Plans (SIPs) have become a common terminology. People use SIP as ageneric name for mutual fund investments.

Systematic withdrawal plan (SWP) is comparatively an unknown entity. SWP is the reverse of SIP. Where in SIP one looks at accumulating a corpus by making regular investments into a fund, in SWP the person can regularly withdraw a fixed amount of money from a fund.  The amount to be withdrawn and the frequency is fixed by the investor. So one can have a monthly, quarterly or annual frequency for any fixed amount that he/she wishes to receive.

Example of  SWP

Mr Panda has Rs.10 lakhs which he wants to use for generating income through SWP. Let’s look at scenarios with investments in three different type of funds.

Amount Invested: Rs 10 lakhs

Systematic withdrawal amount: Rs 10,000 per month

Date of SWP: 2nd of every month

Start of SWP: 02 Feb 2010

End of SWP: 20 Feb 2013

Total amount withdrawn: Rs 240000

For simplicity we have taken three funds from the same fund house and not considered taxation in these calculations.

Balance in Folio as on 4 Feb 2013: HDFC Top 200 Fund (G): Rs 9.07 lakhs HDFC MIP LTP (G): Rs 8.71 lakhs HDFC Income Fund (G): Rs 8.39 lakhs

We hope we have answered your queries on why planning for retirement at an early stage is beneficial for you. If you still have any unanswered questions or need help, feel free to contact us

We would be glad to help you with your planning and investment related decisions.

Debalina Roy Chowdhury

Para Planner

Dilzer Consultants

Sources

http://www.personalfinanceplan.in/opinion/top-retirement-planning-mistakes-you-must-avoid/

https://www.dol.gov/ebsa/publications/10_ways_to_prepare.html

1 July 2016