ULIP : Unit Linked Insurance Plan.It is a product offered by insurance company which gives investor both insurance and investment under a single integrated plan.
Will : legal declaration of how a person wish his/her possession to be disposed after their death
Fund : An amount of money saved or collected for a particular purpose
Insurance Regulatory & Development Authority, it is the apex body overseeing the business of insurance in India. It regulates the business of insurance thereby protecting the interests of the investors.
The stage/phase when an investor earns money and builds up the value of investment through savings.
It is a kind of insurance policy, where the medical and surgical expenses of the insured person is given to him or directly paid to the hospital by the insurance company.
Unit Linked Insurance Plans are the type of insurance where part of your money is invested in units that represent Shares and debt instruments and the remaining is used for your premium.
Amount paid to the insurance company for the purpose of the person's insurance.
It is the raise in the value of Consumer Price Index. That is the rate of increase of the price of a goods or services.
As I grow older, the number of people I meet who are near, or close to retirement continues to grow.
Certainly they’re all mentally prepared for leisurely rounds of golf, time spent watching the grandkids, and languid walks on the beach, BUT very few of them are financially prepared to realize their cherished dreams.
I also have many younger friends, people still in their prime who have just begun their careers.
They are at least 3-decades away from retirement, as an effect they have fallen victim to the illusion of time abundance. Although they “talk” about investing for the long term, their lavish spending, living paycheck to paycheck restrains their will to do the talk. From the beginning to the end, mistakes are many. In this article you will find the “Top 10 Retirement Planning Mistakes” that you must avoid:
1. “I Can Start Saving Later”
2. “I am Too Old To Start Retirement Planning Now.”
3. Not Saving Enough.
4. Falling For Readymade Retirement Plans
5. Overlooking the Medical Need.
6. Not Counting In Your Spouse.
7. Investing Conservatively.
8. Missing On Tax-Saving Opportunities.
9. Lack of Spending Discipline in Retirement.
10. Retirement Planning Without a Financial Plan
Start with the mistakes of attitude towards retirement planning, we will cover the retirement planning blunders and the plan execution errors
ATTITUDE TOWARDS RETIREMENT PLANNING
1) I can start saving later
The decision to postpone savings and investment can’t be a good decision as time will not wait for you to start
Savings and investments should start when young, giving you enough time to reach the goal you have set for yourself. It is interesting to note that the value of money saved in earlier years appreciates much more than what is saved in later years just before retirement due to accumulation of interest and the compounding effect. In addition, starting to save bigger amounts in middle age poses problems with other family responsibilities.
On the other hand, forced retirement has become
quite common due to many reasons. We have seen developed, organized corporate companies run out business, we have seen MNC go bankrupt in the past couple of decades. See here, the 5 events that can force you to retire overnight
If you happen to face such or any form of forced retirement, it’d be a lifesaver to have a retirement plan and keep it running. You are never too early to start saving for retirement.
2) I am too old to save and plan retirement goals
I do not agree with you. It is never late to start saving and plan your retirement . “It is too late and I can’t do my retirement plan now. I will try to face my retirement as and when it comes” is not the right attitude. Anyway you need to face your retirement. You can’t skip or escape. So why don’t you prepare yourself now itself?
However just procrastinating only further complicates your retired life and you may need to meet a lot of disappointments.
Professional Financial Planners will be of immense help to you in this regard with financial computations for the amount of money required for retirement and how you can cut on unnecessary expenses to build the retirement corpus.
3) Aiming a Baseless Retirement Corpus Figure
Choosing the retirement corpus is the origin of your retirement plan.
Everything you will ever do for your retirement will be based on this corpus figure. Therefore choosing the right retirement corpus is as necessary as choosing to have a retirement plan itself.
There are plenty of mistakes people do when it comes to choosing the retirement corpus. Some of them include:
- Choosing a corpus concerning annual income.
- Choosing a corpus concerning the current monthly expense.
- Choosing a retirement corpus on the advice of a retiree.
- Choosing a retirement corpus calculated by an online calculator.
- Choosing retirement corpus calculated using DIY guides.
- Choosing big retirement corpus figure for “just in case” scenario.
There are many more ways people use to make the same mistake of choosing a wrong retirement corpus.
Even though the retirement corpus figure is a number, it should be calculated by accounting every possible factor. Your retirement corpus figure is a number that should delicately balance your expense today, your savings, present age, retirement age, retirement period, inflation, the annual increase in earnings, taxes, and many other things.
Above all this, if you are choosing your retirement corpus from any of the above-said examples, ask yourself
“Is this number trustworthy enough to bet my entire retirement life on it?”
On the other hand, you can choose a big corpus figure for ‘just in case’ scenarios. Bigger is better, right? The bigger number is greater than the right corpus amount anyway, so it cannot be wrong.
Not really! If you set an impossible target, you might lose confidence and give up half-way. Imagine trying an impossible target and losing everything when you could’ve accumulated the right corpus amount with ease.
How Can You Avoid This Mistake?
If you are new to personal finance, you can start by finding how much you can save every month. Meanwhile, you can also keep track of your expenses. It will help you assess your savings potential.
From there, you can educate yourself with retirement planning and corpus calculations. However, it is not advisable to calculate your retirement corpus and using them.
If you have a retirement corpus in mind, you might find this guide helpful: “Is Your Retirement Corpus Sufficient? Use This Reverse Engineering Technique to find out”.
Educate yourself about the process, so that when you plan your retirement with a professional’s help you don’t have to take a leap of faith. Instead, you will be able to consciously trust your retirement plan.
RETIREMENT PLANNING BLUNDERS
4) Falling For Readymade Retirement Plans
In India, readymade retirement plans are sold in the name of ULIPs.
We are leaving out the traditional pension schemes since they are things of the past and insanely bad instruments for retirement planning.
Unit Linked Insurance Plan, on the other hand, takes two different part of personal finance to sell a new all-rounder product.
In simple terms, ULIPs invest in a constellation of instruments like equity and debt funds, and insurance plan. A portion of your monthly premium amount will be directed towards insurance while the rest is invested in the said instruments.
As innovative as they may sound, holistically speaking, they are pretty useless.
It would be a better proverb to explain these readymade retirement plans.
Why Not Readymade Retirement Plans?
Readymade plans sound less demanding of time and money. They are simple, easy to manage, compact.
However, they come at a price. No, it’s not a figure of speech; they come at a price which makes them a bad choice.
- They demand heavy management charges.
- They give only a 6%-7% return.
Looking from another perspective,
- ULIP investments are not as well structured as the mutual fund option available since they are not regulated by SEBI but IRDA.
- ULIPs let you choose only from a set of pre-selected funds to invest your premium in; even though there are hundreds of fund options available in the market.
- ULIPs are long-term lock-in investments, Say for 10-20 years as policy term and 5 years lock-in period.
- It takes out competitiveness among ULIP fund managers, which are prevalent among mutual fund managers to perform better than the other.
In addition to these, ULIPs deny you the control you can have over your retirement plan otherwise.
What Can You Do?
Customized retirement plans are a better option.
A customized retirement plan allows you to tailor a retirement plan as per your needs and potential. Some of the advantages with customized retirement plans are,
- You can make changes to your retirement plan as required.
- You can diversify your investments.
- You can make use of tax-saving opportunities.
- You can have better insights into your investments.
- You can project and improvise your retirement plan whenever possible.
- They mentally prepare you for retirement before you retire.
Customized retirement plans may not be simple or easy to create. But, it provides room for you to develop an apt retirement plan in alignment with your financial goals.
You will be amazed to find out how you can create a better retirement plan by yourself. Read “Customized Retirement Plan For India” to know more about readymade retirement plans and customized retirement plans.
5) Overlooking The Need For Medical Aid
This is an overlooked fact, as old age meant more medical expenses and expenses on annual check-ups.
Also, there could be a need for long term care in hospitals and homes that could drain off a huge sum from your retirement corpus. Any family history of disorders like diabetes, hypertension, and cancer could increase your risk for these disorders further. Your employer may not provide medical aid after retirement. So instead of relying only on your employer-provided Mediclaim policy, it is advisable to take an independent Mediclaim policy when you are young and healthy.
6) Leaving Out Spouse
When we say leaving out spouse, it is not that leaving out spouse completely from retirement planning. But, it is the lack of conscious inclusion of your spouse as an individual retiree.
Overlooking Spouse’s Life Expectancy:
It is very common in self-made retirement plans that do not involve any professional guidance.
Life expectancy and the retirement age decide the number of years you are going to spend in retirement. In turn, the years in retirement influence your retirement corpus.
However, in almost all the cases the life expectancy of only the retiree is considered—leaving out the life expectancy of their spouse. In such cases, after your lifetime, your spouse must live on what’s left of the retirement corpus—if any. That is, they are left to live beyond the actual retirement plan.
If you make the same mistake, how can your spouse manage their retirement life alone—without any actual retirement plan?
Avoid this grave mistake by following these procedural steps:
➥ Consult a physician for complete medical history evaluation to come at accurate life expectancy possible.
➥ Do the same for both you and your spouse.
➥ Choose the highest life expectancy as the life expectancy age for your retirement planning.
➥ Calculate the retirement corpus for the chosen life expectancy.
In this way, your retirement corpus should cover both you and your spouse’s lifetime for financial needs. If any of you must leave the party soon, the other will at least have financial support.
7) Investing Conservatively
Conservative investment is necessary.
Yes! You read that right.
Your retirement corpus will pay all your expenses in your old age. It is vital to preserving that investment capital.
However, it is a serious mistake considering at what time you do it.
In the accumulation phase of your retirement corpus, investing conservatively will stunt the growth of your investment.
What’s wrong With Conservative Investment?
Retirement investments are long term investments; you obviously will have the time frame to work out an investment strategy.
But if you stick to conservative investments, your investments will have the same value as today considering the exponential increase of inflation year over year.
Besides, retirement corpus is a very large sum than any other saving in your life. Hence, taxation will cut off a significant chunk from your retirement corpus.
The effective post-tax retirement corpus will be much less, and nowhere near the target retirement corpus. In turn, it would
So, What Is The Right Investment Strategy?
You must use the availability of time for your advantage by taking calculated risks.
For Example, Planning for retirement provides a wide time horizon for investments. On the other hand, equity mutual funds are proven to be the best investment instrument over the long term. It’s a feasible investment option for long terms.
However, mutual funds have varying risk levels; you will need a risk tolerance assessment to choose the right fund to invest. And active management and periodic reviews will help to keep the investment performance in check.
When you have accumulated the target corpus, you can make a gradual shift towards conservative investments to further minimize the risks.
Avoid the mistake of not harvesting your investment potential and take calculated risks.
Check out “3 Step Investment Strategy For An Indian Retiree” for a detailed understanding of the right investment strategy for retirement.
RETIREMENT PLAN EXECUTION ERRORS
8) Missing On Opportunities To Save On Taxes And Other Benefits
Your retirement corpus and retirement income need to be tax efficient. Suppose if you are choosing fixed deposit as an investment vehicle for accumulating your retirement corpus, then, you need to pay taxes as and when the fixed deposits mature irrespective of that you withdraw interest or reinvest under a cumulative option.
But you need to pay tax only when you withdraw from the mutual funds. Careful selection of investment vehicle can reduce your tax during the accumulation phase as well as during your retired life. Be careful to avail of all these opportunities and invest the saved amount to build up your retirement corpus.
9) Lack Of Balance In Spending After Retirement
I would always consider extremes in spending habits as unadvisable. Being neither frugal in expenses after retirement nor too lavish to deplete all your savings within the first few years is advised.
You have a right to enjoy a relaxed and comfortable time after retirement. But spending lavishly would only upset the amount of retirement corpus forcing you to give up on even necessities in later years.
It seems sensible thinking that old age could deter one’s health to enjoy in later years and so enjoyed in the first few years. Careful financial planning with projected living expenses and other considerations like savings and pension benefits will give you the best mileage out of your retirement plan.
10) Retirement Planning Without a Financial Plan
It is a mindless mistake.
Your decision to have a retirement should be one of your greatest financial and life decisions. But it also leads to one’s choice supportive bias in the name of,
Choice Supportive Bias is when you rationalize that the positive attributes of your choice are worthy of the negative effects it brings.
But, must you lose today to win tomorrow?
The Conflict of Planning:
Financial Planning and Retirement Planning always bring up priority conflicts.
What should one choose? Financial planning secures the present, while Retirement planning secures the uncertain distant future.
Typically one ends up with a decision based on the present financial situation, commitments, and “financial advice” from their social circle. It is usually giving up of retirement planning for securing the present. And on some rare cases vice versa.
No one ever views it as Financial Planning FOR Retirement Planning instead of “Financial Planning vs. Retirement Planning”.
Planning For Relaxed Retirement:
Planning for retirement, in itself, must have a financial plan so that there is a balance between both.
A financial plan, like the retirement plan, is a pivotal part of a holistic plan for your personal finance. Even though the rate of retirement savings will not be as high when you have a financial plan, it will complement and provide positive reinforcement for your retirement plan.
With this holistic plan, you can avoid,
- Financial Dilemma
- Financial Stress
- Emotional Stress
- Compromising of commitments.
Hence a sound financial plan sets the right stage to launch your successful retirement plan.
In simple terms, it will help you to “Use Today to Win Tomorrow”.
If you like these solutions to Top 10 Retirement Planning Mistakes, you might also like the “10 Incredible Things That Guarantee A Stress-Free Retirement”. Check it out now.
The Final Note
I am sure you have already started giving a deep thought to avoid these Top 10 Retirement Planning Mistakes that can ruin meeting your retirement corpus and having a relaxed retirement.
To have a peaceful retirement; having a futuristic financial plan for retirement will be of great help. If you are interested to create a workable financial plan for retirement, then you can take advantage of our free 30-minute discussion with us.