Retired life can be a joyful phase in your lives, filled with abundance and time to fulfill some long-suppressed desires, provided you plan much in advance. The list of mistakes one makes when one plans for retirement is quite long. So, let us look at three of them today.
We all are aware that retirement is inevitable. However, one always feels there is plenty of time for retirement and hence planning for it takes a back seat. Every so often, we come across customers who have put off this task far too many times. When such a situation arises, one needs to increase the savings during the few years left substantially and may be tempted to take more risks than they can afford to take.
Most of us are aware of the magic of “compounding” but to experience this magic, the most important input is time. It is important to start investing towards retirement early, even if, to start with the amount is not substantial or what is desirable. This can be managed by increasing the quantum of investment on a regular basis. It’s never too early to get started, and if you have not done it yet, get started now.
Inflation is not very threatening when you speak about it in percentages. It can wreak havoc on your long-term plans when you underestimate it. As a basic thumb rule your expenses will double every ten years at an inflation of 7 percent. For example, if your monthly expenses are 1L today in 10 years it will be Rs 2 lakh and in 20 years your monthly expenses will be Rs 4 lakh! This will continue well into your retirement and for the rest of your life.
An important effect of this is that people underestimate the corpus required for retirement since they calculate based on current expenses. It often comes as a shock when we calculate the corpus required for retirement and it is four times what they estimate it to be.
Many times, we see that customers come to us with a lot of assets, which ask them to pay on a yearly basis and promise to return specified amounts at regular intervals after 20 years. On the face of it, it seems like a good proposition. However, if you bear in mind inflation, you will immediately see that the value of Rs 1 lakh today will be equal to the value of Rs 25,000 in 20 years. To make matters worse with each passing year the value of the amount received will reduce, making your investment inconsequential.
We see a lot of people who have highly concentrated retirement portfolios. Many a times, there is real estate assigned towards retirement and there are absolutely no financial assets. The plan is to live on the rental and leave the real estate untouched. The problem is rental yield in India is around 2 percent, and unless a person has multiple real estate properties, rental alone may not be sufficient to fund the living expenses. Added to this are hidden costs incurred on maintenance and the time for which the house cannot be rented out and remains vacant. That leaves one with no option but selling real estate to invest in unfamiliar financial assets much later when you are well into your retired life.
It is very important that your assets are diversified, we see most customers hugely skewed towards real assets like houses and the perceived safe fixed deposits. Considering retirement will last for many years, maybe even a few decades, it is not necessary to move away from wealth building assets like equity just because you are retired. Sometimes taking no risk may be the biggest risk you are taking.
Retirement is a very important phase of your life which requires careful planning and thought since it is one goal for which you are not going to get a loan. Give the importance it deserves.
(The writer is founder, Finwise Personal Finance Solutions. Views expressed are personal)