I am Tania Jaleel
ET Wealth’s Narendra Nathan had written about the retirement planning mistakes one should avoid
Here is a look at what these mistakes are and how they can hurt your goal of retirement planning
The first mistake is 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 EPS 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, prime among them is retirement is many years away.
But a delay can cost you dear
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.
Mistake number two is not committing enough
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.
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.
The next mistake is how much one invests 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 because retirement is a critical goal.
At the same time, totally avoiding exposure to growth assets like equity is a mistake.
Low returns from debt products and high inflation is why you should not keep everything in debt.
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
On the next mistake which is 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.
Then is frequent churning
While you should not buy and forget retirement products, it is also wrong to churn your investments too frequently.
Another big mistake is not having medical insurance
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.
Here is a look at a few mistakes people make when it comes to investing
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
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 and PM Vaya Vandana Yojana 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.
And on that note, that will be all for this week
Come back next week for more wealth wisdom
