RETIREMENT PLANNING: Seven money mistakes that can hurt your retirement planning and goals

Three years after joining the National Pension System (NPS), subscribers were allowed to withdraw up to 25% of the self-contributed amount for specific requirements. Now, NPS has reduced the turnaround time for this withdrawal. With the help of an online application facility, subscribers can receive the money on the fifth day in their bank account.

However, despite the fact that the process has been made easier, experts ask subscribers not to press this withdrawal button, except in extreme emergencies. This is because periodic withdrawals from long term retirement products like NPS, EPF or PPF, only jeopardise your retirement goals. “Never ever withdraw early from retirement products because they are meant to be the walking stick in old age and the same should not be used for other purposes,” says Abhijit Bhave, CEO, Karvy Private Wealth. Instead of transferring the EPF account to the new employer, several people tend to withdraw their EPF at the time of job shifts and that is another big mistake. “Since EPF is giving high interest and the same is risk free and tax free, make it a habit to shift it to the new employer every time you change a job,” adds Bhave.

Frequent withdrawal is just one of the mistakes that hurt your retirement goals. There are others as well.

Delayed planning
There are several excuses for not starting retirement planning and the “we are eligible for pension” is one of them. Government employees, who joined after 2004, are not eligible for defined benefit pensions and therefore, should do their own retirement planning. Since their fixed contribution towards NPS won’t be enough to buy sufficient annuities, they should either increase their NPS contribution or invest in other retirement products to bridge the gap. The situation for private sector employees is worse. Pension provided under the Employee Pension Scheme (EPS) of Employee Provident Fund Organisation (EPFO) is meagre — maximum of Rs 7,500 per month.

Even those who understand the need for retirement planning, tend to out it off with various excuses. “The most common four excuses people use to delay retirement planning are no hurry, no worry, no time and no money,” says Bhave. “Most youngsters think why invest now because retirement is far away. However, they should realise that each year of delay will cost them dear,” says Vinay M. Tonse, MD & CEO, SBI Mutual Fund. To generate Rs 1 crore at the age of 60, you need to invest only Rs 4,424 per month if you start at age 30. The same will go up to Rs 13,139 if you delay it till 40 and the requirement will balloon to Rs 48,817 if you delay it further to 50 years.

Another argument for delaying retirement planning is that the income will be higher at a later age. While that is true, the expenses will also be high. One of the reasons being people tend to have children later in life now than before. This means a major portion of the income goes towards education expenses of their wards when they are in their 50s and they may not have enough surplus for retirement planning.

Not committing enough
Though some people start early, they commit the mistake of not committing enough towards the retirement goal. The major reason for this low commitment is the propensity to spend excessively when one is younger. The myth that there will be a sudden drop in expenses after retirement is another reason why people underestimate the required corpus. Younger people should realise that post retirement expenses will remain almost similar. While there will be reduction in some costs like commuting, the same will be replaced with higher medical expenses and leisure travel costs. “If the people in 20s can understand the needs of 60s, they will invest enough towards retirement. Instead of splashing money on second car, they should divert that money also for retirement,” says Rajan Krishnan, Founder Director, Retyrsmart.com, a dedicated retirement platform.

Planning retirement only till 75 or 80 is another reason for low allocation because this reduces the computed requirement. Due to improvement in medical sciences, life expectancy is increasing and therefore, everyone should plan for long retirement years. “Since at least one of the spouses is going to live till 90 years, retirement planning must be for a minimum tenure of 30 years,” says Krishnan.

How much in growth assets
Though some suggest 100% equity exposure while saving for retirement because the time horizon is long, it is not the right advice as retirement is a critical goal. At the same time, totally avoiding exposure to growth assets like equity is a mistake. “While planning for retirement, one should not over-emphasise the safety aspect and ignore the return aspect. The standard investment rule of safety, liquidity and return (SLR) need to be changed to safety, return and liquidity (SRL) while investing in retirement products,” says Tonse. Investors can interchange the return and liquidity because the investment horizon is long.

Low returns from debt products and high inflation is why you should not keep everything in debt. “The actual inflation for you, including lifestyle creep, will be much higher than the official inflation figure and you won’t be able to beat inflation if the entire retirement corpus is parked in low risk products like debt,” says Amol Joshi, Founder, PlanRupee Investment Services. Compared to the current debt return of around 7%, adding equity into your retirement corpus and increasing the blended returns to 10% can make a big difference to your final corpus. As seen in the chart, an investment of Rs 5,000 per month for 30 years grows to Rs 61 lakh at 7% returns and to Rs 1.13 crore at 10% returns, a difference of Rs 52 lakh.

Investing in high cost products
Retirement and pension plans from insurance companies are high cost products and therefore, you will get only low returns from them. On the other hand, NPS is the lowest cost accumulation tool for retirement and the cost of retirement products from mutual funds fall in between these two. Within retirement mutual funds, there is a gap of around 1% between direct plans and regular plans. Even this 1% can make a big difference.

While an investment of Rs 5,000 per month for 30 years will grow to Rs 61 lakh at 7% returns, the same will grow only to Rs 50.23 lakh at 6% returns— a shortfall of Rs 10.77 lakh.

Frequent churning
While you should not buy and forget retirement products, it is also wrong to churn your investments too frequently. “Frequent churning will reduce returns because a part of the proceed will go as exit loads in mutual funds and transaction costs if you are investing directly in stocks or bonds. The tax incidence due to churning will also reduce the accumulation,” says Joshi.

Not having medical insurance
“The optimism level is high for youngsters and therefore, they don’t care about the medical expenses that may come at later age. Assuming a life expectancy till 90, the last 10-15 years can be medically challenging. The healthcare costs are also increasing beyond the normal inflation,” says Krishnan. Having a proper health insurance is the only solution for this. Most people don’t take individual insurance policies because they are covered by corporate policies. Not taking health policies at a young age becomes a stumbling block after retirement because you might have already developed several lifestyle diseases. Then, insurance companies may deny you health policies or may charge additional premiums.

Investment mistakes
The first part of retirement planning is building a retirement corpus and the second part is investing the same. Accumulating everything through products that needs to be withdrawn at the time of retirement like EPF will be a big mistake. It is better to go with products like PPF that you can continue even after retirement and this will help you to avoid the reinvestment risk at a later age.

How should you invest the money that comes to you as lump sum and needs to be invested at retirement? Here people usually commit two mistakes and the first one is the extra focus on liquidity, resulting in the entire corpus being parked in bank FDs. While liquidity is important and part of the retirement corpus needs to be easily accessible, please note that this corpus needs to last for 30 years and therefore, one needs to consider safe options that offer better returns. Continuing with your PPF by extending it by five years at a time will be a good option because it offers tax free returns of 7.1%. Keep on accumulating in it by investing Rs 1.5 lakh per annum. Similarly, retired people should not ignore Senior Citizens’ Savings Scheme (SCSS) and PM Vaya Vandana Yojana (PMVVY) that offer 7.4% interest. Invest Rs 15 lakh each in both schemes.

The second mistake is to become ‘extra cautious’ and invest everything in safe debt. What experts suggest, on the other hand, is a small exposure to equities through a diversified mutual fund to increase the portfolio return. “Investors need to do the fine balancing here. They may lose the money if they go too aggressive on equities and the money may not last till the end if they play too safe,” says Krishnan.

(Graphics by Sadhana Saxena/ET Prime)